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[105 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
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S. Hrg. 105-581
INTERNAL REVENUE SERVICE'S METHODS
=======================================================================
HEARING
before a
SUBCOMMITTEE OF THE
COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE
ONE HUNDRED FIFTH CONGRESS
SECOND SESSION
__________
SPECIAL HEARING
__________
Printed for the use of the Committee on Appropriations
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Available via the World Wide Web: http://www.access.gpo.gov/congress/senate
______
U.S. GOVERNMENT PRINGING OFFICE
49-746 cc WASHINGTON : 1998
_______________________________________________________________________
For sale by the U.S. Government Printing Office
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COMMITTEE ON APPROPRIATIONS
TED STEVENS, Alaska, Chairman
THAD COCHRAN, Mississippi ROBERT C. BYRD, West Virginia
ARLEN SPECTER, Pennsylvania DANIEL K. INOUYE, Hawaii
PETE V. DOMENICI, New Mexico ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri PATRICK J. LEAHY, Vermont
SLADE GORTON, Washington DALE BUMPERS, Arkansas
MITCH McCONNELL, Kentucky FRANK R. LAUTENBERG, New Jersey
CONRAD BURNS, Montana TOM HARKIN, Iowa
RICHARD C. SHELBY, Alabama BARBARA A. MIKULSKI, Maryland
JUDD GREGG, New Hampshire HARRY REID, Nevada
ROBERT F. BENNETT, Utah HERB KOHL, Wisconsin
BEN NIGHTHORSE CAMPBELL, Colorado PATTY MURRAY, Washington
LARRY CRAIG, Idaho BYRON DORGAN, North Dakota
LAUCH FAIRCLOTH, North Carolina BARBARA BOXER, California
KAY BAILEY HUTCHISON, Texas
Steven J. Cortese, Staff Director
Lisa Sutherland, Deputy Staff Director
James H. English, Minority Staff Director
------
Subcommittee on Treasury and General Government
BEN NIGHTHORSE CAMPBELL, Colorado, Chairman
RICHARD C. SHELBY, Alabama HERB KOHL, Wisconsin
LAUCH FAIRCLOTH, North Carolina BARBARA A. MIKULSKI, Maryland
TED STEVENS, Alaska ROBERT C. BYRD, West Virginia
(ex officio) (ex officio)
Professional Staff
Patricia A. Raymond
Tammy Perrin
Lula Edwards
Barbara A. Retzlaff (Minority)
C O N T E N T S
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Page
Opening remarks of Senator Campbell.............................. 1
Statement of Linda Sanders, Littleton, CO........................ 4
Prepared statement........................................... 12
Remedy for abuses................................................ 13
Statement of Dennis Marty, Grand Junction, CO.................... 14
Statement of Amy Powers, Littleton, CO........................... 16
Statement of Katherine Morehead, Aurora, CO...................... 20
Prepared statement........................................... 23
Senator's examples of other cases................................ 25
Statement of Alvin Stjernholm, Lakewood, CO...................... 25
Prepared statement........................................... 27
Statement of Robert Lesher, Lakewood, CO......................... 28
Prepared statement........................................... 31
Need for major changes........................................... 33
Statement of Doris Martinez, former IRS revenue agent, president,
Associated Tax Centre, Inc..................................... 33
Taxpayer Advocate and Problem Resolution Program................. 34
Disparate treatment of minority taxpayers........................ 35
Secret hit lists and actions against taxpayer representatives.... 36
Abusive audits and lack of due process........................... 38
Penalty and interest abatements and reform....................... 38
Taxpayer education and the Internal Revenue Code................. 39
Prepared statement of Doris Martinez............................. 41
Antibrowsing bill................................................ 45
Statement of Kenneth Tuchman, founder and president, TeleTech.... 46
Prepared statement........................................... 50
Possible pilot program........................................... 52
Statement of Hon. Charles O. Rossotti, Commissioner, Internal
Revenue Service................................................ 55
Prepared statement........................................... 60
Public service announcements..................................... 62
IRS outreach efforts............................................. 62
Innocent spouses................................................. 63
IRS penalties.................................................... 64
Changing of seizure numbers...................................... 65
Credit card payments............................................. 66
Use of private contractors....................................... 66
Automation at IRS................................................ 67
Educating children on tax issues................................. 67
Burden of proof.................................................. 68
Questions submitted by Senator Campbell.......................... 70
Statement of Robert M. Tobias, president, National Treasury
Employees Union................................................ 77
Prepared statement........................................... 78
Accountability for IRS budget.................................... 81
Prepared statement of Charles Pat Smith, State Adjutant, the
American Legion, Department of Colorado........................ 83
INTERNAL REVENUE SERVICE'S METHODS
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TUESDAY, APRIL 14, 1998
U.S. Senate,
Subcommittee on Treasury and
General Government,
Committee on Appropriations,
Denver, CO.
The subcommittee met at 9 a.m., University of Denver,
Denver, CO, Hon. Ben Nighthorse Campbell (chairman) presiding.
Present: Senator Campbell.
Panel 1
NONDEPARTMENTAL WITNESSES
STATEMENTS OF:
LINDA SANDERS, LITTLETON, CO
DENNIS MARTY, GRAND JUNCTION, CO
AMY POWERS, LITTLETON, CO
KATHERINE MOREHEAD, AURORA, CO
ALVIN STJERNHOLM, LAKEWOOD, CO
ROBERT LESHER, LAKEWOOD, CO
Opening Remarks of Senator Campbell
Senator Campbell. Good morning. The Treasury and General
Government Subcommittee will be in session.
First I want to thank the Center for Public Policy here at
the university for offering their assistance in setting up this
room and providing us a space to do this hearing.
As you know, the Senate Appropriations Subcommittee on
Treasury and General Government oversees the budget for the
Internal Revenue Service. The IRS has become America's least
loved agency, to put it mildly.
Today we will be discussing the Internal Revenue Service's
methods.
Every Member of Congress, including me, has received
constituent complaints about taxpayer abuse by the IRS. Our own
files in our office are filled with so-called horror stories,
and some we may hear this morning.
A recent hearing by the Senate Finance Committee provided
shocking information from IRS employees themselves about how
taxpayers are mistreated. In the midst of all this debate,
Congress is now trying to rein in some of those abuses and
reform how the IRS is managed.
The House of Representatives recently passed a bill to
reform the IRS, and the Senate Finance Committee has just
presented their version to the full Senate for consideration
next month. So the testimony we will be taking today will
become part of that public record on this issue.
The IRS has a huge job. It is responsible for collecting
over $1.5 trillion in taxes. Tax collection is a necessary
function, and most Americans understand this. But it does not
have to be a necessary evil.
Over 80 percent of American taxpayers voluntarily comply
with tax laws--a fact that many people do not realize. It is
past time for the IRS to decide to work for the taxpayers, as
private industry does.
The IRS can learn a great deal from the private sector. As
an example, in the private sector if someone has a problem with
a credit card or other type of billed account, they can usually
call, sometimes on a 24-hour-a-day basis, and talk to a human
being, actually talk to someone who has the authority to try to
fix it rather than some automated system with a recording.
Taxpayers are also demanding that they can rely upon
information provided by the IRS and not be punished with late
fees and penalties if someone else at the IRS disagrees with
the advice that they were first given.
Taxpayers are tired of being notified years after they have
filed that they have an additional tax obligation, which has by
then grown to several times the initial debt because of
interest and penalties. Many who would have paid the initial
tax had they known are shocked to learn that they owe an
enormous debt over and above the tax obligation. Sometimes they
simply can't pay it.
In short, taxpayers are demanding that they be treated
fairly, and that is exactly what they have every right to
expect.
The IRS has a new Commissioner, Mr. Charles Rossotti, and I
am pleased that Mr. Rossotti has accepted our invitation to be
here with us today. Mr. Rossotti, would you stand just for a
moment, over here on the right? Thank you very much for coming.
[Applause.]
Mr. Rossotti needs to hear first hand what some of our
citizens have been facing in dealing with the representatives
of his agency. He has come on board just recently and, in fact,
during a very critical period for the IRS, and I certainly
compliment you on your willingness to go around the United
States and take on this job and listen to the citizens
themselves.
Unlike most previous IRS Commissioners, Mr. Rossotti is not
a so-called policy wonk or a Washington bureaucrat. He was a
successful businessman, and his management experience as the
founder and chief executive of a computer consulting company
gives him the skills and knowledge to make the necessary
culture and technology changes so that the IRS can be effective
in its interaction with taxpayers. He knows how to make a
payroll. He knows what it is like to deal with myriads of
Government mandates and paperwork in trying to comply with the
taxes that he in turn had to pay as a private businessman.
Today, on our first panel we will hear from Coloradans who
have had problems with the IRS. With us today are individual
taxpayers, business taxpayers, and innocent spouses.
On the next panel, the second panel, we'll have two people
with different perspectives on problems faced by the IRS and
specific recommendations for solving those problems.
Then we will have an opportunity to listen to the
Commissioner himself, and I am sure we will all want to hear
his plans to make the agency more responsive as well as his
observations on some of the stories that he is going to hear.
Our final witness will be Mr. Robert Tobias, the president
of the National Treasury Employees Union, and Mr. Tobias
represents the IRS employees themselves. So it will be
interesting to get his perspective as well.
Some people, of course, just want to eliminate the IRS
altogether. We have heard that a number of times. We have
received a lot of mail in our office saying that. I think we
all recognize that there has to be some way of collecting taxes
if you want good highways, if you want schools, if you want a
national defense. We have to have a form of collecting taxes.
Today I hope we can discuss the ways to make the IRS a more
responsive agency to all of us. We will be hearing some very
disheartening stories this morning, but I think if we give Mr.
Rossotti the opportunity to try to fix the problems--although
he is responsible for the agency now, I would hate to, as they
say, shoot the messenger since he just recently came on board
in the last half year.
Our first panel this morning will consist of Ms. Linda
Sanders of Littleton, Dennis Marty of Grand Junction, Amy
Powers of Littleton, Katherine Morehead of Aurora, Dr. Alvin
Stjernholm--I hope I have pronounced that right, Doctor--of
Lakewood, and Mr. Robert Lesher, also of Lakewood. Thank you
all for agreeing to share your concerns.
When we first decided to do this hearing, we contacted a
number of people, and, very frankly, some were very reluctant
to testify. We had several say they would only testify if they
could be behind a screen because they were very clearly worried
about some retribution. But I want to give anybody here
testifying today an absolute assurance of this committee--and I
know I can speak for Mr. Rossotti, too--that that simply will
not happen, and we will continue to monitor your activities.
Also, we obviously have a little bit of a time constraint.
We have 3 hours. We have tried to divide it up among the people
testifying in time for some questions and some dialog, and so
we will try and limit, I think, the first panel to about 10
minutes each. So if you have a very long, involved testimony,
be assured that all of it will be included in the record. You
may wish to abbreviate your comments to about 10 minutes.
With that, we will start in the order that I read your
names, if Ms. Linda Sanders would go ahead. Why don't you pull
the microphone over pretty close to you, so the people in the
back of the room can hear. And thank you for agreeing to be
here, Linda.
Statement of Linda Sanders
Ms. Sanders. Thank you. I hope my voice isn't too squeaky.
I am not enjoying being here.
Senator Campbell. Closer.
Ms. Sanders. My name is Linda Sanders. I have had an
experience with the IRS which has demonstrated to me their
brutal power. And I wish to ask the Commissioner if his agents
should be able to commit perjury and falsify documents in order
to collect tax. So far, the IRS has only justified what they
did to me by saying, ``it is our mission to collect the proper
amount of tax * * *.''
Now, all of us understand that the IRS must collect tax,
but the objection that I have and many Americans have is that
the IRS breaks the law in meeting that goal. In my case,
breaking the law resulted in my losing over $150,000 more than
the tax that was owed, as well as my home, which took 20 years
to save up for, as well as destroying my relationships with my
family. It simply wasn't necessary, so why did they do it? And
are there any circumstances under which they should be allowed
to go unpunished and continue with these practices?
My ex-husband and I owed the IRS $26,000 because of a
capital gain tax imposed upon us because we sold our expensive
home and we bought down to pay bills rather than declare
bankruptcy. And I am so grateful that this horrible capital
gain tax has since been changed.
We couldn't pay the tax, and the IRS put a lien on the
house to protect their interest in the property. After about 1
year they began collection procedures and they seized the house
with the intent to sell it to access the equity to pay the tax.
However, I protested--and I hope I can use that word without
being labeled an anti-Government terrorist. I protested to my
Congressman and said that if IRS sold this house and forced us
to buy down again, we would incur another capital gain tax and
then we would have to lose the next house. And it seemed insane
to me that I had to be homeless just because I made the choice
first to be financially responsible and I lowered my standard
of living by buying down instead of going bankrupt. So my
protests to my Congressman resulted in the IRS releasing that
seizure in 1993.
I would like to show that because it is significant to the
rest of what I have to say. If we could just cut the lights
right in front of the screen?
Senator Campbell. Maybe just right in front of the screen
we can turn this down a little bit?
[The information follows:]
[GRAPHIC] [TIFF OMITTED] T13AP14.003
Ms. Sanders. If you can see this, it is a 1993 seizure on
my property, but what happened is when I asked my Congressman
to help me because of the catch-22 I found myself in, they
released it, and here is the evidence: Disposition of Property.
It was released prior to sale for an administrative decision.
And it is important that you notice that this is the seizure
that was released.
A year later, the IRS began levying my ex-husband's
paycheck because they had to collect the tax. Here is the levy
on wages. It was for the year of the tax we are talking about,
and it was against my husband, and the date was in February
1994. So in 1994, they did begin collecting the tax.
[The information follows:]
[GRAPHIC] [TIFF OMITTED] T13AP14.004
Ms. Sanders. Then, without any warning whatsoever, about 1
month after the wage levy, the IRS put a for sale sign on my
front door, and they advertised my house for sale with the date
set for 2 weeks hence. Because I had worked with a tax attorney
who specialized in taxpayer rights on levy and seizure, I knew
the IRS was violating the law because they weren't giving me
the warning notices I knew I was allowed before sale. The law
provides, first, for a 10-day warning under section 6331, and
then a second warning under section 6331(d). Section (a) is 10
days, section (d) is 30 days, so altogether the taxpayer has 40
days to get a loan or sell the house at a profit and pay the
tax.
Because they sold my house without complying with the law
and because I knew it from working with a tax attorney, I
refused to redeem from that sale. I refused because it would
ratify what they had done and it would waive my right to object
later. I wanted the sale voided, and I wanted the IRS to back
up and follow the law. That way I wouldn't have to pay all the
extra charges and penalties that they add on when they sell a
tax lien, and in my case that came to an extra $6,000.
So I waited for the inevitable court hearing which would
come after the 6-month redemption period. And during those 6
months, I prepared. I intended to show the court that the sale
was void because the IRS hadn't given me time to get a loan,
pursuant to the law that gives me the warning notices. My
evidence here shows that the IRS released the 1993 seizure, and
I rightfully expected that any subsequent seizure would have to
be preceded with the 40-day noticing requirements again because
the law states that subsequent seizures have to follow the same
procedures--that is section 6331(c)--especially since my ex-
husband's wages were being levied for the tax. But instead,
depriving me of time to get a loan deprived me of the chance to
pay just the lien. And, instead, they got 20 years of my life
savings, and they left me homeless, and I am still homeless
today.
So during the 6-month period after the sale, I acquired
some of the sale records which the IRS is required to make
under section 6340, and these records prove that the house was
sold under a second seizure for which no seizure notice had
been given. And while documents had been done under the new
number, the IRS never gave me the 40-day notices. Instead, the
IRS altered the old seizure documents, which were released, to
make it appear as though all the steps had been followed for
the second seizure.
And let me show you that.
[The information follows:]
[GRAPHIC] [TIFF OMITTED] T13AP14.005
[GRAPHIC] [TIFF OMITTED] T13AP14.006
Ms. Sanders. Here you can see the new 1994 number written
over the 1993 number. And here let me show you--here is the
1993 seizure that was released, and it lines up just perfectly
to show you what is written underneath the 1994 number.
The IRS still does not deny that no notice was given for
the new 1994 seizure. They simply say that no notice was needed
because the second time it was just a very, very long seizure
from the first 1993 one, and that they have to change numbers
because IRS changes everyone's seizure numbers every October to
match the fiscal year. And I would like to show you the sworn
testimony of the agent explaining that they have to change
seizure numbers every fiscal October on everybody.
[The information follows:]
Testimony of IRS Agent
* * * at the time this was the number assigned to this seizure,
for control purposes, for accounting.
Question. So, why did the number change?
Answer. After we went into 1994--I have explained that--its
accounting purpose is so then we no longer can pay out seizure
expenses out of 1993 budgets. So, we had to reissue a 1994
number for it, because of a fiscal tax year.
Question. When did the seizure happen that occurred?
Answer. 1993.
Question. All right. So, we have the date of this document
as April 7, 1993?
* * * number. A seizure number is nothing other than a way that
we internally track seizure expense so we can make sure that
any advertisement, any expense that we have, if we have to
change locks, if we do whatever we have to do in some certain
situations we have to, if it's real property, we have to have
grass mowed, whatever we have to do has to be paid out by our
accounting department under that seizure number.
So, the fact that there's a seizure number here, and then
later there's another seizure number, this occurred because it
went beyond our fiscal year, and this is a 1993 seizure expense
number, when it went into 1994, fiscal year 1994, we had to
renumber that.
Ms. Sanders. Here the agent says, ``Let me explain a
seizure number. A seizure number is nothing other than a way
that we internally track seizure expense so we can make sure
that any advertisement''--I am sorry. I am reading the--she did
several pages, and I have brought * * * she is asked how come
the number changed. She says, ``At the time this [was the]
number assigned to this seizure, for control purposes [and it
was] for accounting.''
``After we went into 1994--I have explained that--its
accounting purpose so then we no longer can pay out seizure
expenses out of 1993 budgets. So, we had to reissue a 1994
number for it, because of a fiscal tax year.'' She is saying
that right here.
At the bottom, she says, ``So, the fact that there's a
second seizure number here * * * because it went beyond the
fiscal year, and [it] is a 1993 seizure expense number, when it
went into 1994, fiscal year 1994, we had to renumber that.''
Well, I called IRS data headquarters in Maryland to find
out if this is true, if all the seizure numbers have to be
changed every fiscal October. And I have a tape recording of
that conversation if anyone would like to hear it. And, of
course, the clerk laughed and said that would be a
recordkeeping nightmare, there is no way they can change fiscal
numbers to match the fiscal year. She said that once a seizure
number is assigned, it stays there.
But, additionally, I decided to find out from the
Government Accounting Office whether or not the seizure budget
for 1993 went dry and that perhaps they might have had to
change the numbers, and the Government Accounting Office first
told me that, no, the 1993 budget was to last all the way until
1997, it did not run dry, and he said seizure budgets are not
used for residential seizures. And as evidence of that, I went
to the title company that prepared the title for my seizure,
and it was paid by Visa.
[The information follows:]
[GRAPHIC] [TIFF OMITTED] T13AP14.007
Ms. Sanders. So these lies caused the State court to uphold
the sale as proper, and I was evicted from my home. The court
determined that I must have gotten all the notices and that I
must be the one lying. But all I got was the notice of sale the
day that it went into the paper, and I couldn't possibly secure
financing that quickly. It was a malicious act to punish me for
daring to demand that the IRS follow the law.
Unless and until the IRS Commissioner himself admits that
the agency broke the law here and committed perjury, no court
will contradict the IRS. Perhaps judges can't even survive
audits. The IRS is a self-monitoring agency, like the police,
and if their internal affairs department does not admit the
problem, the taxpayer has no remedy. The IRS is so powerful
that even the courts are intimidated by them and refuse to
question their integrity.
So if the Commissioner doesn't accept the integrity and
admit this was perjury and document falsification, there is no
remedy for American taxpayers like me.
So, please, Mr. Commissioner, would you please give me the
only remedy that will make me whole again and admit that the
IRS does not change seizure numbers every October? And please
be an example of the honesty and integrity that is necessary in
our Government. Because even the President is now allowed to
authorize perjury, so I don't see how any district director
could do so.
I hope that these hearings are not just a ``warm fuzzy''
for the public, and I hope something will be done about this.
Thank you, Senator Campbell. [Applause.]
Prepared Statement
Senator Campbell. Thank you, Ms. Sanders. We have your
complete statement and it will be made part of the record.
[The statement follows:]
Prepared Statement of Linda Sanders
My name is now Linda Sanders--I have had an ``experience with the
IRS'' which has demonstrated to me their brutal power. I wish to ask
the Commissioner if his agents should commit perjury and falsify
documents in order to collect tax from me. So far, they have justified
what they did to me by saying, ``it is our mission to collect the
proper amount of tax * * *''.
Now, we all understand that the IRS must collect tax--but the
objection that many Americans have--is that the IRS breaks the law in
meeting that goal. In MY case--breaking the law resulted in my losing
over $150,000 MORE than the tax owed--as well as my home which took 20
years of life to save up for--as well as destroying my relationships
with my family. IT SIMPLY WASN'T NECESSARY--SO WHY DID THEY DO IT? AND
ARE THERE ANY CIRCUMSTANCES UNDER WHICH THEY SHOULD BE ALLOWED TO GO
UNPUNISHED AND CONTINUE THESE PRACTICES?
My ex-husband and I owed the IRS $26,000 because of a capital gain
tax imposed upon us because we sold our expensive home and ``bought
down''. (I am so grateful that this horrible capital gain tax has since
been changed). We couldn't pay the tax--and the IRS put a lien on the
property. After about a year they began collection procedures and
seized the house with the intent to sell it to access the equity in it
to pay the tax. However--I protested to my Congressman and said that if
the IRS sold the house--and forced us to ``buy down'' again--we would
incur ANOTHER capital gain tax and then lose the NEXT house. It seemed
insane to me that I had to be homeless just because I made the choice
to be financially responsible--and lower my standard of living by
buying down instead of going bankrupt. My protests to my Congressman
resulted in the IRS releasing the seizure in 1993.
Then, a year later, the IRS began levying my ex-husband's paycheck
for the outstanding tax.
Then, WITHOUT ANY WARNING WHATSOEVER--a month later, the IRS put a
``for sale'' sign on my door and advertised my house for sale with the
date set for 2 weeks hence. Because I'd worked for a tax attorney who
specialized in taxpayer rights on levy and seizure, I KNEW the IRS was
violating the law that gives the taxpayer NOTICE that they are about to
lost their home. The law provides for: (first) a 10 day warning under
26 USC 6331(a) and then a second warning for 30 days under 26 USC
6331(d). Altogether the taxpayer has 40 days to get a loan or sell the
house and pay the tax--they only gave me 14 days--not enough time to
secure financing. They wanted me homeless to punish me for the work I
had done with the tax attorney--protecting taxpayer rights.
Because they had sold my house without complying with the law--AND
I KNEW IT BECAUSE OF WORKING WITH THE ATTORNEY--I refused to redeem
from the sale--I refused because it would ratify what they had done--
and waive my right to object. I wanted the sale voided and I wanted the
IRS to back up and follow the law. That way I wouldn't have to pay all
the extra charges and penalties they add on when they sell tax liens,
which, in my case came to about $6,000.
I waited for the inevitable court hearing which would come after
the 6 month redemption period. During those 6 months, I prepared. I
intended to show the court that the sale was void because the IRS
hadn't given me time to get a loan to pay the tax. My evidence here
shows that the IRS released the 1993 seizure of the house and so I
rightfully expected that any subsequent seizure would have to be
preceded with the 40 day noticing requirements again under 26 USC
6331(c). Especially since my ex-husband's wages were levied for the tax
already. Depriving me of the time to get a loan deprived me of the
chance to pay just the lien. Instead, they ALSO got 20 years of life
savings and left me homeless.
During the 6 month period after the sale, I acquired some of the
sale records which the IRS made as required by 26 USC 6340. The record
showed that the house was sold under a SECOND seizure for which no
SECOND notice had been given. The new seizure had been done under 94-
0088D but I did not get any 40-day seizure notices. Instead, the IRS
altered the old seizure document which were released to make it appear
as if all the steps had been followed for the second seizure.
The IRS still does not deny that no notice was given for the new
1994 seizure number. They simply explain away the two seizure numbers
(for which no notice was given for the second) by saying that IRS
changes EVERYONE'S SEIZURE NUMBERS each October--to MATCH THE FISCAL
YEAR. I spoke with data Headquarters and the clerk said this isn't
true.
Additionally, another IRS agent said that the IRS HAS to change all
the numbers every fiscal October because the seizure ``budget'' runs
dry and they have to pay bills out of a new budget.
However, the bill for the Title Company work says it was paid by
VISA, not a check from a budget.
These lies caused the state court that evicted me from the home, to
uphold the sale as ``proper.'' UNLESS and UNTIL the IRS Commissioner,
himself, admits that the agency broke the law, no court will NOT
contradict the IRS's word. The IRS is a self monitoring agency--like
the police--and if their internal affairs department does not rectify
the problem--the taxpayer has NO REMEDY.
Mr. Commissioner--DO YOU CONDONE THESE LIES? Will you please give
me the only remedy that can ``make me whole'' again, by admitting that
the IRS does NOT change seizure numbers every fiscal October? Or please
tell us under what circumstances you permit the IRS to lie and falsify
documents in order to take property from American taxpayers?
Thank you.
Remedy for Abuses
Senator Campbell. Linda, there is a remedy, and you are
part of it. That is why you are here. These abuses, some have
gone on for years and years and years, and it is not the kind
of thing that can get turned around overnight, but there are
many people that are very concerned about you.
I might also mention, too, that this isn't the U.S. Senate,
but it is a Senate hearing, and in that respect, I would ask
the audience if they would respect the decorum of the Senate. I
don't mind, you know, a few light comments and so on, but we
have done a few hearings in the last few weeks where we have
had protesting in the committee room and, you know, screaming
and singing of the national anthem and all these other things,
and we want to avoid that. You have a first amendment right,
obviously, as anybody does, but it could really be disruptive
if it gets out of hand.
With that, I would like Dennis Marty to go ahead, please.
You might want to pull that microphone closer.
Statement of Dennis Marty
Mr. Marty. Good morning. My name is Dennis Marty. My wife
and I live in Grand Junction, CO, which is about 250 miles west
of here. I am currently under a disability retirement from the
U.S. Postal Service. I have worked as a teacher and coach, as a
Colorado State highway patrolman, as a data analyst, and
chemical sampling coordinator, and as a mail carrier. The
chemical sampling coordinator position required that I have a Q
level, or top secret, security clearance. My wife has taught
elementary school in Grand Junction for the past 20 years. I
have a bachelor's degree in physics and math, a master's degree
in secondary education, and a Ph.D. in environmental
engineering.
I could spend all of my time talking about being disabled
and my tax audit where the auditor extended my audit into
multiple years. Instead, I will spend the majority of the time
talking about two specific items involved in this audit.
The sequence of events leading to our current predicament
with the IRS started in February 1997. We received a letter
from the Colorado Department of Revenue dated February 5,
stating that based on information they received from the IRS,
we had understated my unemployment benefits for 1994 and we
owed additional tax, interest, and penalties. We paid the
amount requested on March 17 because at that time we could not
find the documents to prove that the claim was wrong. We
returned the letter with the payment and apparently did not
keep a copy of that letter.
We received an audit notice from the IRS dated March 21.
The audit was set for May 8. The documents requested were our
tax returns for 1993, 1994, and 1995, income documentation,
farm expenses, and my wife's miscellaneous employment expenses.
During the audit meeting on May 8, one of the initial
claims made by the auditor was that I had understated my 1994
unemployment benefits from the State of Colorado in the amount
of $522. Due to an injury suffered in a fall at work, I was
unable to remain seated for the length of time required to
complete the audit that day. This is how the auditor found out
that I had become disabled and that I had been on leave without
pay for the previous 8 months. The auditor said that he would
complete the audit and contact us.
Early on Saturday morning, May 10, the auditor contacted me
by phone. During this phone call, he repeatedly accused me of
understating unemployment benefits from 1994 and overstating
mortgage interest in 1995 by $4,448. He informed me that
because of these changes, he was expanding the audit to include
the years 1990 through 1996. The auditor was belligerent during
the phone call. It seemed to me that by making these
accusations the auditor was implying that we were attempting to
defraud the Government.
The phone call was followed by a written information
document request form detailing the additional material that
the auditor wanted. On May 17, we supplied some of the
additional documents he requested. We did not supply the tax
returns for the years of 1990, 1991, and 1992. Later we found
out that he could only go back 3 years, making those years off
limits, anyway.
The auditor's preliminary report had us owing in excess of
$28,000 in additional taxes, interest, and penalties. This
included the two errors that we were accused of making. The
auditor also had disallowed every penny of our medical claims,
as well as the majority of the rest of our itemized deductions.
This appears to be an abuse of the burden-of-proof concept.
The final report calls for $24,397.20, and both errors were
excluded. But he still disallowed the majority of the itemized
deductions.
The facts of our case are as follows: The $522 understated
unemployment benefits was actually a State tax refund. This
amount was correctly claimed on line 10 of the 1994 tax return.
The auditor did not include the 1099 miscellaneous that he
claimed that he used to make his accusations when he supplied
his notes to me under my Freedom of Information Act request. I
sent a second request for these specific notes, and I have not
received any additional documents.
I have not shown the auditor this documentation that I had
relating to this particular problem, but it was still removed
from the final report. I was able to document the $4,448
overstated mortgage interest with a form the auditor said he
had not received. In 1995, we refinanced our property and
received two 1098 forms reporting mortgage interest. The
auditor did not have one of these two documents when he accused
us of this error.
The auditor claimed that the IRS does not give information
to State revenue departments until after an audit is closed.
This was in response to my request that he send a letter to the
Colorado Department of Revenue stating that the information
supplied to them was in error.
Despite several requests under the Freedom of Information
Act, the Colorado Department of Revenue has been unable to
provide me with a copy of their letter dated February 5, 1997.
In conclusion, I have several questions that I feel apply
to our audit.
No. 1, after watching the testimony given during the Senate
Finance Committee's hearing on the IRS, I have to wonder if my
disability and leave without pay status contributed to the
vigor with which the auditor pursued this case.
No. 2, why didn't the auditor have the second 1098 mortgage
interest form? Was it the bank's error or an internal IRS
error? Since the financial institution was not penalized, I can
only assume that it was an IRS error.
Where is the 1099 miscellaneous that the auditor claimed
was for an additional $522 unemployment benefit? I contacted
the Colorado Department of Labor and Employment and had them
check their archives, and they sent me documentation that I had
claimed the correct amount on my 1994 return. So there would be
no 1099 miscellaneous anywhere.
Why can't I get a copy of the February 1997 letter from the
Colorado Department of Revenue which clearly stated their
information came from the IRS?
I have testified in court as an expert witness. If I were
testifying as an expert witness and made mistakes similar to
the two that this auditor made, the jury would probably be
instructed to disregard my testimony.
Why are the rules of evidence different for the IRS than
for other law enforcement agencies? And why can the IRS expand
an audit when that expansion has been initiated because of
erroneous data?
Finally, due to my disability, lengthy leave without pay
status from the Postal Service, and my low rate of income from
the Federal Employees Disability Retirement, we are not able to
pay the $24,000 that the IRS says we still owe unless we sell
our property. Even that might not be enough money to pay the
IRS. Our audit is currently in the appeals process and is
ongoing.
I would like to thank you for the opportunity to present
this testimony.
Senator Campbell. Thank you.
Before we go on to Ms. Powers, while it is fresh in my
mind, just let me ask you a couple of questions. When you had
your conversation with the auditor, was that taped by the
auditor?
Mr. Marty. He did not tell me that it was.
Senator Campbell. Well, it would have been illegal if he
hadn't, if he hadn't shown the tape recorder. But when you said
he was abusive in nature, was that done in writing or just over
the phone?
Mr. Marty. This was over the phone on that Saturday
morning.
Senator Campbell. And under the Freedom of Information Act,
you didn't ask for any documentation that he might have taped
you or put something in writing that you didn't receive?
Mr. Marty. What I requested was specifically his notes
relating to how he made that claim of understating the
unemployment benefit.
Senator Campbell. And you never got that?
Mr. Marty. He never sent it.
Senator Campbell. Did you contact our office or Senator
Allard's office to try to get it?
Mr. Marty. I have not as of this time.
Senator Campbell. Would you do that?
Mr. Marty. OK.
Senator Campbell. If you would talk to Ricardo afterward,
or sometime when you can, we will try and expedite that if we
can get it. Sometimes we can't, but hopefully we can.
Mr. Marty. Right.
Senator Campbell. With that we will go on to Ms. Powers,
please?
Statement of Amy Powers
Ms. Powers. Good morning. Thank you, Senator Campbell, for
the opportunity to testify today as an innocent spouse, and
thank you, Mr. Commissioner, for coming to Denver for this
hearing. Also, I would like your personal assurance, Mr.
Commissioner, that my participation today will in no way
adversely affect my current negotiating situation with the
Internal Revenue Service.
Before I begin, Mr. Rossotti, I would like you to put aside
your title of IRS Commissioner and, Senator, I would like you
to put aside your title as well, and listen to this story
simply as a taxpayer.
Let's assume you, Mr. Rossotti, were married 12 years ago.
You met your wife while still in college, and she had a highly
successful job. You were just starting out in the business
world. Unfortunately, you were divorced a year later and went
your separate ways, but not before signing a joint tax return.
The majority of income reported on that return was earned by
your wife prior to your marriage. You worked part-time for
minimum wage and had the necessary taxes deducted from your
paycheck.
You were only married for 5 months that year, and by August
of the next year, your wife no longer wanted the responsibility
of being married and asked to be separated. You relocated to
Georgia in 1987. Five years ago, you were remarried, but 2
weeks prior to your wedding day, you received a letter from the
IRS stating that you owed in excess of $30,000 for that joint
return signed in 1986.
Mr. Rossotti, Senator Campbell, the only difference in this
story and my own personal experience is I have turned the
tables on you. This is my story, and as one taxpayer to
another, there is something very wrong here.
I am currently at the stage of an offer in compromise with
the IRS. I have offered to pay the original assessed amount of
$9,000, but that was flatly rejected. This process of offer in
compromise has taken nearly 2 years to negotiate.
At almost every turn, I have hit a wall in terms of
requesting information or filing information. It appears to me
that the right hand doesn't know what the left hand is doing. I
have noticed that in requesting certain information, letters
are signed by one person, but questions should be directed to
another. This slows the process.
An agent in Idaho returned my original offer in compromise
because it was submitted on a photocopied form rather than a
carbon-copy original. This slows the process.
Agents have cited internal rules to be applied externally.
Again, with respect to my offer in compromise, an agent
recently stated, and I quote, ``Colorado statutes work to
inhibit acceptance of offers from one party to a joint
liability.'' In essence, the Colorado statute should not be
binding on the IRS. However, the IRS district counsel's office
has established an internal rule which requires collection
officers to treat the statute as binding regardless of the
State of residency of the spouse.
Since when does a State law override a Federal law? And if
that is the case, wouldn't Georgia law prevail and uphold my
divorce decree, which is a legal and binding document stating
that my ex-husband would be responsible for any and all debt,
be it taxes or otherwise?
Mr. Rossotti, the rules have been made up along the way,
and the game continues to be played out at my expense.
Meanwhile, interest and penalties continue to rise. Even today,
as I testify before you, interest and penalties creep upward.
Is this right, as one taxpayer to another? It would seem to me
that since I have been forced into this situation by your
agency, the least you could do is freeze interest and penalties
while your agency takes its time--2 years--to evaluate my
offer.
I have received letters from your agency stating to pay up
or we will garnish wages, take your 401(k) and profit sharing.
Additionally, you believe my husband should be held liable and
his income used to help satisfy the debt. As a lieutenant
commander in the U.S. Naval Reserves, a Federal Government
employee, this angers him more than anything.
Recently in the news there have been countless stories
shared by innocent spouses all over the country. Their stories
are not much different than mine. And as I watched ``Dateline''
last night, I was sickened by the inefficiencies and lack of
compassion displayed by your agency.
There are two things that bother me about my situation and
the other innocent spouses, and they should bother you, too:
First, it is our right as citizens of this country to work,
pursue education, and raise a family. Second, it is our right
as citizens of this country to succeed in these things and
pursue the American dream if we so choose. Excuse me.
These are my rights, and I am being punished for
succeeding.
Your agency today demands $45,000 and believes that I
should be able to pay it because I am young, have a college
degree, and have a very successful career. I am proud of these
things and never in a million years would have dreamed that
they would be used against me. Furthermore, this situation has
brought on numerous tax liens filed against me, while my ex-
husband deliberately moved from location to location. My
employer was notified to garnish my wages. My credit is, as you
can imagine, not good. This has prohibited me and my spouse
from purchasing a home and forces my spouse to carry the burden
of most of our debt.
Additionally, as with many other spouses, I am sure, this
situation has caused undue stress on my relationship with my
husband and my family.
As your agency pursues innocent spouses, you are
simultaneously crippling families and family structures by
forcing spouses to seek multiple jobs to pay off debt. You are
affecting the care and education of our children by forcing us
to seek other, less expensive day-care options or schools. And
you are affecting our minds.
We cannot simply shake off the IRS and just walk away. This
is not the American dream. Doesn't this bother you, as one
taxpayer to another?
I have been specifically targeted, harassed, and threatened
simply because I am an easy target. Since my divorce in 1988, I
have dutifully filed returns in the States of Georgia and
Colorado. Here is a question for you: If I am to be held
jointly liable for the tax debt, why then had I never received
a notice regarding the debt until nearly 6 years later? That
letter, dated November 3, 1992, stated, and I quote, ``Our
records show that we have previously sent you notices, but we
have not yet received full payment. This is final notice.''
Please, Mr. Commissioner, with all due respect, your agency
owes me the common courtesy of sending me the same
correspondence allegedly sent to my ex-husband. I have yet to
receive anything.
Instead, your agency waited almost until the statute of
limitations was to expire, nearly 6 years, to contact me and
inform me that I owed $34,869.35. The original assessed tax was
only $9,000. Had I been informed of this delinquent debt, I
would have made sure that it was taken care of at that time.
There are two reasons why I never paid anything. First, I was
unaware that the amount was outstanding. And, second, I was
under the impression that my court-filed divorce decree was a
legal and binding document created to protect me from this
exact situation.
Furthermore, my attorneys contacted my ex-husband directly
in February 1993, and he agreed that it was his liability and
not mine.
Over the past 10 years, interest and penalties have soared
to over $37,000. These moneys are inflated assessments of time
wasted by your agency--time with which there was plenty of time
to inform me and the thousands of other innocent spouses of
these so-called debts. Instead, it appears your agency has
allowed these debts to increase to such amounts that it makes
it ridiculous and impossible for anyone to pay.
Furthermore, we are presumed guilty immediately. It seems
to me the burden of proof should lie with the Internal Revenue
Service. We at least give that common courtesy of innocent
until proven guilty to other taxpayers.
In closing, I would like to add that your agency has
contacted me on several occasions asking for my assistance in
locating my ex-husband. I provided phone numbers and addresses
of family, including his parents. This effort has been to no
avail. Ironically, sometime in 1990 or 1991, my ex-husband was
employed by the Government, having joined the U.S. Navy Seals.
He was right in the palm of your hand and was apparently given
special permission by the Government to waive payment of the
tax debt until he was out of the service. According to his
mother, the Navy was very interested in keeping him. He was
bright and the perfect specimen for the Navy Seals.
Subsequently, he left the Navy early. He quit.
Furthermore, in a letter dated February 1993, an IRS agent
stated that Mr. Hammond, my ex-husband, had contacted IRS Agent
Mr. Gonzales to arrange a payment agreement and was advised by
Mr. Gonzales that he lived in an area serviced by south Los
Angeles office and that he would have to wait to be contacted
by the south Los Angeles office before making payment
arrangements.
This is simply outrageous. Again, right within your grasp,
but he was told to hold off making payment arrangements until
another district agent contacted him.
If the tables were turned, as in the story I mentioned
earlier, Mr. Rossotti, you would be testifying today,
struggling to protect your basic rights. So, instead, I testify
before you and ask that you call off your agency. I would like
my case dismissed. I would like to be absolved of any tax debt
related to 1986, which is the year in question.
Again, as I think back on the ``Dateline'' story last
night, it is disgusting what is happening to innocent spouses
across the country. The fact that your agency has the power to
treat one person the way they did and are continuing to do is
unforgivable and criminal.
It is estimated that over 50,000 individuals have been
forced into similar situations, and this is wrong. How many
more people must testify before this problem is resolved? Isn't
it already painfully obvious that the rules must be changed
now?
Mr. Rossotti, I respectfully ask your assistance in making
some long overdue changes in your agency and ask for your
support for the innocent spouses around the country, as well as
the other taxpayers.
Thank you.
Senator Campbell. Ms. Powers, first, it is not his agency.
It is our agency. That is why we are here, and that is why we
are going to make some changes.
Let me just ask, you are a schoolteacher, as I understand
it?
Ms. Powers. No; I am sorry. I am a recruiter for a
consulting company.
Senator Campbell. Your taxes went, because of the 7 percent
compounded daily, from roughly $9,000 to four times that much
now.
Ms. Powers. To $45,000.
Senator Campbell. And at your present salary, do you think
you could ever get it paid off? Is it compounding faster than
your ability to even pay it?
Ms. Powers. Yes, sir.
Senator Campbell. Well, I want you to know, you mentioned
that if we Senators or he, the Commissioner, ever had
experiences like that as private citizens, we would understand
better. Believe me, I have. I wasn't born in the Senate. Let me
tell you, I have. Years ago, about 1\1/2\ or 2 years after we
were married in--oh, it must have been about 1966 or so, we had
our taxes filled out by a professional tax person, and he made
a terrible mistake. And about 1 year later, I got a bill from
them for, as I remember, around $24,000, and I was broke, had
no money, just trying to start a business, didn't have any
money. And I was angry and disgusted. I just went down and told
them, Put me in jail, I'm not going to pay a damn thing. And we
negotiated some. He sputtered around, said, well, I don't want
to put you in jail. So we ended up where I paid 20 cents on the
dollar, or something to that effect. But, believe me, some of
us have been in that position where we didn't know where to
turn and we just kind of threw up our hands and gave up. Don't
give up.
Ms. Powers. Thank you.
Senator Campbell. Thank you. We will now hear from Ms.
Morehead.
Oh, and, by the way, let me ask you, too. Have you been at
all into work with our office on your problem or Senator
Allard's or any of the Congress people?
Ms. Powers. Yes; I have. I have written letters to Senator
Allard and to you, and I have actually spoken with Ricardo on
several occasions.
Senator Campbell. All right. Thank you.
Ms. Morehead.
Ms. Morehead. Thank you. I hope----
Senator Campbell. Oh, and I also want to remind you, we are
told that our time is already going to cut into the people that
want to testify a little later, so if we could try to keep it
to about 10 minutes, we would certainly appreciate it.
Statement of Katherine Morehead
Ms. Morehead. My hope is my testimony today will help those
listening to better assess what works and what doesn't work
from both the viewpoint of the taxpayer and the people working
at the IRS. My experience has shown me our present U.S. tax
laws do very little to empower taxpayers or IRS employees and
even less to create expedient, synergistic, creative solutions
to tax problems, especially tax problems resulting from
divorce.
The following timeline will demonstrate the frustration and
sense of powerlessness I felt during the past 8 years of
dealing with the IRS regarding my 1989 joint tax return filed
following my divorce on April 9, 1990. In April 1987, while
living in southern California, my husband and I separated after
17 years of marriage. With two young children, 3 and 5, I moved
to Denver in November of 1987. Although not legally separated,
Gary Morehead, my ex-husband, and I lived as though we were
divorced for the next 2\1/2\ years. My husband sent me money
for living expenses which the judge in the 1990 divorce decree
rules as alimony and child support.
As a part of my divorce decree in April 1990, my husband
agreed to pay the 1989 taxes, something which he had done for
the previous 18 years of our marriage. Following the divorce, I
discovered he had not filed a tax return and called our
accountant in Las Vegas to find out what I needed to do. I was
told by the certified public accountant that I could do nothing
and would have to wait until he filed.
Taking the accountant's advice, I waited and asked Gary to
file the tax return, never dreaming by simply filing a return
for 1989 married separately I could have avoided this entire
situation.
Gary did tell me he was filing, and although late, he would
be paying the 1989 taxes. Thinking this had been resolved, I
went about the job of being a single parent, raising two young
children and putting my life back together.
In the fall of 1993, I received a phone call from the IRS
informing me the 1989 taxes had not been paid, and because I
had signed the joint return, I was liable for the $24,000 debt
my ex-husband had not paid. An IRS agent was sent to my work to
evaluate whether I had extra money to begin payments on this
debt. After looking at my financial picture, she told me she
found I was not able to make payments. She had chosen to not
freeze my checking account or garnish my wages and said she
would never force the sale of my home where as a parent I was
raising two dependent children.
She reassured me the IRS in Las Vegas, where my ex-husband
was living, had assessed him $654 a month payments toward this
debt. However, I was told the IRS would put a lien on my house
to secure the debt as my ex-husband showed no assets and I had
an amount equivalent to the debt as equity in my home.
Disturbed about the course of events, but assured by the IRS
that his payments would pay off the lien and it would be
removed, I moved on with my life.
During the following years, I discovered that my ex-husband
only made payments for a few months. He was out of work for a
few months, and when he did return to work as a developer and
consultant, the IRS apparently did not follow through to return
him to his payment plan. I called the IRS and asked repeatedly
for information, for help, and for solutions which would allow
my children and me to remain in our home and not become
homeless. I was told either I pay the now $40,000 debt with
penalties and interest or hire an attorney to sue my ex-
husband.
Making $20,000 per year teaching, I did not have the luxury
of extra money for attorney's fees. Finally, in the summer of
1996, I was told about a free tax clinic at Denver University,
where law students would help me for free if they decided to
take my case. The clinic reviewed my case and decided to help
me. As they spoke to the IRS and pressed the IRS in Las Vegas
and Phoenix for information regarding this case, we were told
the IRS could not even find a file on Gary Morehead and that he
had not been pursued because their workload was so heavy and
they did not have the staff to work on a small case like mine.
In August 1997, the DU tax clinic was discontinued. I
continued to ask the IRS for information, talking with people
in Seattle, Salt Lake City, Phoenix, Las Vegas, and Denver. In
September 1997, I was informed by my ex-husband he had applied
in that spring for bankruptcy and because the IRS had not
pursued him in 3 years, according to the law, he would not be
liable for the IRS debt, which was now almost $50,000 and that
I would be totally liable.
Communicating with the IRS and bankruptcy court in Las
Vegas and Denver, I discovered what he told me was true.
According to the IRS in Las Vegas, Phoenix, and Denver, my
State divorce decree was not recognized by the IRS, and I was
left accountable for an original debt of $24,000, which had now
grown to over $47,000. Because the IRS had a lien on my home
and had chosen not to pursue my ex-husband, who now was making
over $165,000 a year, and because of the IRS and Federal
bankruptcy laws, I was responsible for this debt and was
expected to pay it when making less than $20,000 plus child
support. Through the bankruptcy records, I also discovered my
ex-husband had not paid taxes for several years following our
divorce, while I had filed each year and all my refunds had
gone toward the payment of this debt.
In January, feeling powerless but hopeful I could refile as
an innocent spouse, I hired an attorney and we went to the IRS
with the attached compromise. I would pay taxes on the amount
of money I received in 1989, based on the court decision for
alimony and child support in April 1990 when my divorce decree
was finalized. When we went to the IRS office, we were told the
current IRS laws do not allow for this type of agreement.
According to the local IRS office, my only options remain
paying the $47,000 debt by selling my home, offer a compromise
which could not be less than the equity in my house, which is
about $45,000, file bankruptcy, or wait out the statute of
limitations, which is another 5 years. None of these seemed to
me to be fair or just.
Through this experience, several things were obvious.
First, the unfair expectation of a single mother to pay off
debt which was greater than her income was unrealistic. Second,
it became apparent the IRS, for whatever reason, was unwilling
to pursue my ex-husband for the taxes owed. Because I had
decided to invest my money in a home for myself and my
children, the IRS used the lien on my home as an easy out
rather than serving equitable justice. The IRS never attached
wages on an individual--my ex-husband--who had a much higher
income and who had access to the money which was originally
taxed.
Most importantly, the difficulty of obtaining timely
information from the IRS was frustrating. When asking for IRS
information which was pertinent to my case, I was told to call
another office or flatout refused information as to whether the
IRS was getting money from my ex-husband.
A greatly simplified tax code could create a greater
understanding for taxpayers and eliminate the need for a large,
unwieldy, inflexible bureaucracy unable to negotiate fair and
just settlements. Instead of relying on the advice of expensive
accountants and attorneys, which the average taxpayer can ill
afford, a simpler tax code could empower rather than defeat
individuals like myself who are willing to pay our fair share
of taxes. Hopefully, the new law severing joint liability will
go a long way to helping individual taxpayers and IRS employees
administer justice with our tax system, particularly in cases
of divorce.
I am grateful to the IRS Commissioner, to Senator Campbell,
and all lawmakers who are courageous in their willingness to
look at problems and listen to stories like mine in order to
create crucial and needed changes in our tax code and the
administering of it.
Prepared Statement
Senator Campbell. Thank you, Ms. Morehead. We have your
complete statement and it will be made part of the record.
[The statement follows:]
Prepared Statement of Katherine Morehead
My hope is, my testimony today will help those listening to better
assess what works and what doesn't work from both the viewpoint of the
taxpayer and the people working at the IRS. My experience has shown me,
our present U.S. tax laws, do very little to empower taxpayers or IRS
employees and even less to create expedient, synergistic creative
solutions to tax problems, especially tax problems resulting from
divorce.
The following time line will demonstrate the frustration and sense
of powerlessness I felt during the past eight years of dealing with the
IRS regarding my 1989 joint tax return filed following my divorce on
April 9, 1990. In April of 1987 while living in southern California my
husband and I separated after seventeen years of marriage. With two
young children three and five, I moved to Denver in November of 1987.
Although not legally separated, Gary Morehead, my ex-husband, and I
lived as though we were divorced for the next two and half years. My
husband sent me money for living expenses which the judge in the 1990
divorce decree ruled as alimony and child support.
As a part of my divorce decree in April 1990, my husband agreed to
pay the 1989 taxes, something which he had done for the previous 18
years of our marriage. Following the divorce, I discovered he had not
filed a tax return and called our accountant in Las Vegas to find out
what I needed to do. I was told by the CPA that I could do nothing and
would have to wait until he filed.
Taking the accountant's advice I waited and asked Gary to file the
tax return, never dreaming by simply filing a return for 1989 married
separately, I could have avoided this entire situation.
Gary did tell me he was filing and although late he would be paying
the 1989 taxes. Thinking this had been resolved, I went about the job
of being a single parent, raising two young children, and putting my
life back together.
In the fall of 1993, I received a phone call from the IRS informing
me the 1989 taxes had not been paid, and because I had signed the joint
return, I was liable for the $24,000 debt my ex-husband had NOT paid.
An IRS agent was sent to my work to evaluate whether I had extra money
to begin payments on this debt. After looking at my financial picture
she told me she found I was not able to make payments. She had chosen
to not freeze my checking account, or garnish my wages and would never
force the sale of my home where as a parent I was raising two dependent
children.
She reassured me the IRS in Las Vegas, where my ex-husband was
living, had assessed him $654.00 a month payment toward this debt.
However, I was told the IRS would put a lien on my house to secure the
debt as Gary showed no assets and I had an amount equivalent to the
debt as equity in my home. Disturbed about the course of events, but
assured by the IRS that his payments would pay off the lien and it
would be removed, I moved on with my life.
During the following years, I discovered Gary only made payments
for a few months. He was out of work for a few months and when he
returned to work as a developer and consultant, the IRS apparently did
not follow through to return him to his payment plan. I called the IRS
and asked repeatedly for information, for help and for solutions which
would allow my children and me to remain in our home and not become
homeless. I was told either I pay the now $40,000 debt with penalties
and interest or hire an attorney to sue my ex-husband.
Making $20,000 per year, I did not have the luxury of extra money
for attorney fees. Finally, in the summer of 1996, I was told about a
free tax clinic at Denver University where law students would help me
for free if they decided to take my case. The clinic reviewed my case
and decided to help me. As they spoke to the IRS and pressed the IRS in
Las Vegas and Phoenix for information regarding this case, we were told
the IRS could not even find a file on Gary and he had not been pursued
because their work load was so heavy and they did not have the staff to
work on a small case like mine.
In August of 1997, the DU tax clinic was discontinued. I continued
to ask the IRS for information, talking with people in Seattle, Salt
Lake City, Phoenix, Las Vegas and Denver. In September of 1997, I was
informed by my ex-husband, he had applied in the spring of 1997 for
bankruptcy and because the IRS had not pursued him in three years, he
would not be liable for the IRS debt which was not almost $50,000 and I
would be totally liable.
Communicating with the IRS and bankruptcy court in Las Vegas and
Denver, I discovered what he told me was true. According to the IRS in
Las Vegas, Phoenix and Denver, my state divorce decree was not
recognized by the IRS and I was left accountable for an original debt
of $24,000, which had now grown to over $47,000. Because the IRS had a
lien on my home and had chosen not to pursue my ex-husband who now was
making over $165,000 per year, and because of the IRS and Federal
bankruptcy laws, I was responsible for this debt and was expected to
pay it, when making less than $20,000 plus child support. Through the
bankruptcy records I also discovered my ex-husband had not paid taxes
for several years following our divorce, while I had filed each year
and all my refunds had gone towards the payment of this debt.
In January, feeling powerless but hopeful I could refile as an
innocent spouse, I hired an attorney and we went to the IRS with the
attached compromise. I would pay taxes on the amount of money I had
received in 1989, based on the court decision for alimony and child
support in April 1990 when my divorce decree was finalized. When we
went to the IRS office we were told the current IRS laws do not allow
for this type of agreement. According to the local IRS office my only
options remain paying the $47,000 debt by selling my home, offer a
compromise which could not be less than the equity in my house (about
$45,000), file bankruptcy or wait out the statute of limitations
(another 5 years). None of these seemed to me to be fair or just.
Through this experience several things were obvious. First, the
unfair expectation of a single mother to pay off a debt which was much
greater than her income was unrealistic. Secondly, it became apparent
the IRS, for whatever reason was unwilling to pursue my ex-husband for
the taxes owed. Because I had decided to invest my money in a home for
myself and my children the IRS used the lien on my home as an easy out
rather than serving equitable justice. The IRS never attached wages on
an individual who had a much higher income and who had access to the
money which was originally taxed.
Most importantly, the difficulty of obtaining timely information
from the IRS was frustrating. When asking for IRS information which was
pertinent to my case I was told to call another office or flat out
refused information as to whether the IRS was getting money from my ex-
husband.
A greatly simplified tax code could create a greater understanding
for taxpayers and eliminate the need for a large unwieldy, inflexible
bureaucracy unable to negotiate fair and just settlements. Instead of
relying on the advice of expensive accountants and attorneys, which the
average taxpayer can ill afford, a simpler tax code could empower
rather than defeat individuals like myself who are willing to pay our
fair share of taxes. Hopefully, the new law severing joint liability
will go a long way to helping individual taxpayers and IRS employees
administer justice with our tax system, particularly in cases of
divorce.
[Clerk's note.--The compromise mentioned in Ms. Morehead's
statement does not appear in the hearing record, but is available for
review in the subcommittee's files.]
Senator's Examples of Other Cases
Senator Campbell. About 1\1/2\ years ago, I got a call from
a lady in Montana, whom I had known just slightly, had met, who
had a story almost identical to yours--a single mom, several
children--in fact, her oldest son just recently died in a rodeo
accident--living in an 8-foot camper out in the woods, and went
to a local store to make the call. That is how broke she was
and how scared she was, too. She had a story almost identical
to yours, and the next thing that really worried me is she just
flat told me on the phone that she was going to kill herself,
that she had no options, totally hopeless, didn't know who to
turn to.
I called the Billings agency of the IRS, and to their
credit, they did go to work on it right away and helped
straighten it out and it was all kind of taken care of. But I
think that in some extreme cases that is not out of the realm
of thinking, when people feel that they are set upon by the
Government and they have nobody to turn to and nobody to talk
to. That has entered the minds of a number of people when they
have seen everything lost because of what they consider to be
punitive actions by their own Government. There is something
wrong in our Government when people do that.
I had a guy in Steamboat Springs a few years ago, hiding
behind bushes when I was doing a town meeting, who whispered at
me when I came out of the town meeting and asked me if he could
talk to me. And I said sure, and I went over and talked to him.
He said he had been warned by IRS agents not to talk to his--I
was in the Congress on the House side--not to talk to his
Congressman. Boy, there is something wrong with Government when
we have that kind of intimidation and fear. So thank you for
testifying.
Ms. Morehead. In all credit to the person who evaluated me
initially, I mean, she did have that compassion to allow me to
stay in my home, and I am grateful.
Senator Campbell. Well, it does go to show there are some
IRS people that really are trying, and I know in the case of
this Montana woman, somebody up there really went to work and
did fix it, fortunately for that lady and for the IRS, too,
because I was certainly going to hold them responsible.
Dr. Stjernholm.
Statement of Alvin Stjernholm
Mr. Stjernholm. Thank you. I want to thank you, Senator
Campbell, for the opportunity and the privilege to testify here
this morning relative to the abuse by the IRS. I want to point
out that the passage of the House of Representatives bill
relating to the IRS is a nice gesture, but does nothing to
compensate the hard-working citizens financially raped by the
IRS.
A letter dated October 15, 1997, from Donald M. Squires,
Chief, Branch Disclosure Litigation, well documents the fact my
attempt to get my records through the Freedom of Information
Act from the IRS was stalled for 4 years as Mr. Squires' letter
relates to my appeal dated December 10, 1993. As of this date,
the documents requested in 1993 have not been furnished, and
the reason that letter appeared was because of the Senate
hearings before--the IRS before the Senate.
My attorney stated to me personally that he does not know
of other individuals financially raped by the IRS as bad as my
wife and I. My wife and I donated a Mobile Educational Unit to
the Colorado Chiropractic State Association, and I was allowed
a writeoff approximately $58,000 over a 3-year period.
Approximately 12 years later, IRS officials ignored the statute
of limitations and the IRS code and denied my gift given 12
years earlier and properly audited by the IRS examiners for 16
consecutive years. The IRS officials then decided 3 of the 16
years they had audited were wrong, and the IRS then demanded
$230,000 in back taxes, liened our home, and destroyed our
credit.
I had made a deposit on a ranch in Wyoming and had
approximately $216,000 in equipment and personal property in
Wyoming. The IRS seized all of the equipment and personal
property in Wyoming and held an auction. A Freightliner
tractor, a La Crosse 24-ton low boy equipment trailer, and an
International Track (250) caterpillar loader were all auctioned
off miles from the auction site. Receipts for major repairs to
document market value were ignored.
Following the auction, the Stjernholms were allowed $25,000
instead of $216,000 toward the $230,000 assessed by the IRS.
For over 1 year, my attorney has attempted a cash
settlement and an additional $226,000 was paid to the IRS in
May 1997. During the past year of negotiations, additional
amounts of $3,000 and $25,000 were demanded or all negotiations
would be terminated and additional property would be seized and
auctioned. In January 1998, an additional $73,000 was paid and
liens were finally released.
I am currently paying twice the interest rate of the going
interest rate because no one will touch you because of your
lien by the IRS. And my banker was threatened for helping me
along the way before these liens were released.
The IRS officials ignored the statutes, the statute of
limitations, and the laws as they relate to the IRS codes and
the audits they previously approved for 16 consecutive years.
Senator, will you please introduce legislation or amend the
current IRS bill in order to compensate a hard-working Korean
vet and his wife in addition to other numerous people who have
been financially raped by the IRS.
At age 65, I am several hundred thousand dollars in debt
because of the IRS financial rape job.
Senator, the Tax Code is a real problem, but the arrogant
IRS officials out of control, ignoring the codes and the
statutes, is a more serious problem.
I should bring to your attention the fact I have spent
several hundreds of thousands of dollars on tax attorneys, but
these tax attorneys are intimidated by the demands of the IRS
officials. Even the tax judge reversed his position 1 year
later, as well documented by a $1,000 transcript of a 1-day
trial. And at the conclusion of that trial, I should add, the
judge was so impressed with our testimony that he came down and
literally shook hands with my wife and I and wished us well.
But 1 year later, he handed down a decision, and it was
negative to our trial.
In closing, I should report the fact I was again audited in
1991, as my herd of buffalo as a separate business was in
question. The IRS examiner was pleasant and efficient and
approved my return as 100 percent OK.
Based on the testimony of the former employees and my
personal experience with approximately 17 examiners, all but
one of these examiners were pleasant, competent, and good,
hard-working IRS employees. The real problem is with the IRS
officials, starting with the past Commissioners of the IRS. I
have a great deal of correspondence with those officials to
document their abuse and financial rape.
Again, Senator Campbell, I want to thank you for allowing
me to present this testimony of financial abuse, and thank you,
Mr. Rossotti, for your attendance and your interest here today.
Thank you.
Prepared Statement
Senator Campbell. Thank you, Dr. Stjernholm. We will insert
your prepared statement in the record.
[The statement follows:]
Prepared Statement of Dr. Alvin Stjernholm
The passage of the House of Representatives bill relating to the
IRS is a nice gesture, but does nothing to compensate the hard working
citizens FINANCIALLY RAPED BY THE IRS.
A letter dated October 15, 1997, from Donald M. Squires (Chief,
Branch Disclosure Litigation) well documents the fact my attempt to get
my records through the Freedom of Information Act from the IRS was
stalled for four years as Mr. Squires' letter relates to my appeal
dated December 10, 1993. As of this date, the documents requested in
1993 have not been furnished.
My attorney stated to me personally that he does not know of other
individuals financially raped by the IRS as bad as my wife and I. My
wife and I donated a Mobile Educational Unit to the Colorado
Chiropractic State Association and I was allowed a write-off of
approximately $58,000 over a three year period. Approximately 12 years
later, IRS officials ignored the Statute of Limitations and the IRS
codes and denied my gift given 12 years earlier and properly audited by
the IRS examiners for 16 consecutive years, the IRS officials then
decided three of the sixteen years they had audited were wrong and the
IRS then demanded $230,000 in back taxes, liened our home and destroyed
our credit.
I had made a deposit on a ranch in Wyoming and had approximately
$216,000 in equipment and personal property in Wyoming. The IRS seized
all of the equipment and personal property in Wyoming and held an
auction. A Freightliner tractor, a La Crosse 24-ton low boy equipment
trailer and an International Track (250) caterpillar loader were ALL
AUCTIONED OFF MILES FROM THE AUCTION SITE. RECEIPTS FOR MAJOR REPAIRS
TO DOCUMENT MARKET VALUE WERE IGNORED.
Following the auction, the Stjernholms were allowed $25,000 instead
of $216,000 toward the $230,000 assessed by the IRS.
For over a year our attorney has attempted a cash settlement and an
ADDITIONAL $226,000 WAS PAID TO THE IRS IN MAY 1997. During the past
year of negotiations additional amounts of $3,000 and $25,000 were
demanded or all negotiations would be terminated and additional
property would be seized and auctioned. In January, 1998, an additional
$73,000 was paid and liens were finally released.
THE IRS OFFICIALS IGNORED THE STATUTES, THE STATUTE OF LIMITATIONS,
AND THE LAWS AS THEY RELATED TO THE IRS CODES AND THE AUDITS THEY
PREVIOUSLY APPROVED FOR 16 CONSECUTIVE YEARS.
Senator, will you please introduce legislation or amend the current
IRS House Bill in order to compensate a hard working Korean Veteran and
his wife in addition to other numerous good people who have been
financially raped by the IRS.
At age 65, I am several hundred thousand dollars in debt because of
the IRS financial rape job.
Senator, the tax code is a real problem, but the arrogant IRS
officials out of control, ignoring the codes and the statutes, is a
more serious problem.
I should bring to your attention the fact I have spent hundreds of
thousands of dollars on tax attorneys, but these tax attorneys are
intimidated by the demands of the IRS officials. Even the tax judge
reversed his position a year later, as well documented by a $1,000
transcript of a one-day trial.
In closing, I should report the fact I was again audited in 1991,
as my herd of buffalo as a separate business was in question. The IRS
examiner was pleasant, efficient and approved my return as 100 percent
okay.
Based on the testimony of the former IRS employees and my personal
experience with approximately 17 examiners, all but one of these
examiners were pleasant, competent and good hard-working IRS employees.
The real problem is with the IRS officials, starting with the past
Commissioners of the IRS. I have a great deal of correspondence with
those IRS officials to document their abuse and financial rape.
Thank you for allowing me to present this testimony of financial
abuse by the IRS.
Statement of Robert Lesher
Senator Campbell. Mr. Lesher, if you would go ahead.
Mr. Lesher. Thank you, Senator. I am Robert Lesher, a
Denver resident for 40 years. Microphone coming through? OK.
Former Air Force fighter pilot, and I have been a commercial
real estate broker and investor for a long time here, or was
until all this broke loose.
By 1990, when this starts, my estate was composed mainly of
general partnerships with other local investors in real estate,
and it was a pretty good estate. By the end of 1991, I had no
estate after the IRS did its initial----
Senator Campbell. Mr. Lesher, I think you are beginning to
fade out a little bit. You need to get closer to the
microphone.
Mr. Lesher. By 1991, the estate has ceased to exist after
the IRS audit. I am going to speed this up because I know you
are running late.
In January 1990, an IRS auditor contacted me and wanted to
go over the 1988 returns. He explained he as working for a
special project out of the TEFRA office in Ogden, UT, the IRS
Service Center. No partnership of mine had ever been a so-
called TEFRA partnership, tax shelter partnership. However, he
had stumbled on a partnership we had put together in 1989 to
buy a care home here in Denver up in the Highlands area caring
for about 120 mentally handicapped people, people who could not
function--they were not dangerous, but they couldn't function
well in society on their own.
The Federal funds earmarked for that population, however,
were sidetracked by the Governor of Colorado into a new State
bureaucracy, and the home failed. We lost our shirts, and the
120 residents ended up on the street. More than a few of them
died.
After the auditor began working on our records, my wife
suffered a stroke--not connected to the audit, I don't
believe--and this was a bad one, and I asked for a little time
to help care for her. The auditor was under a lot of pressure.
He couldn't do much. He stayed on us. I asked for help from a
problem resolution officer here in Denver by the name of Mr.
Blighton. He was a very nice fellow, told me to file a form 911
and he would try to help, but that, unfortunately, the Denver
District was all out of form 911's, but he would be glad to
send me one when they got some more in. Until then, he really
couldn't do anything.
Three months later, he did send me one. I filled it out the
same day and returned it, and he wrote a letter saying, you
took too long filling this out, I can't help you. End of that
chapter.
Mr. Virkler, the auditor, in continuing his work, stated he
had audited the partnership returns before coming to me, which
is required by IRS procedure--and common sense. It turned out
he had not because he was under a lot of pressure to push
through as many audits as he could. The project needed as many
scalps as soon as possible to show the public that, in theory,
they were beating up on the rich, and we were supposed to be
one of the rich. We were out of business, but we were the rich.
The auditor revised the K-1's in the partnership to show
that we had a profit instead of having lost, and in violation--
and he told me this--of a tax code paragraph, 108(d)(7)(A), he
flowed the so-called income that he created through our S Corp.
partners to our personal returns and charged us with all sorts
of unpaid taxes, penalties, interest, high crimes, and
misdemeanors, like everybody else I have been listening to this
morning.
He was quite open about the whole thing, what he was doing
that was right and what he was doing that was wrong. He even
helped me write an appeal and pointed out all he had to do was
file an amended return for the form 8082 that nobody had ever
heard of--I finally found out what it was--and the whole matter
would go away.
As the months went by, the appeal went in, the months went
by, nothing happened. I started looking for an appeals officer
and I couldn't locate where the appeal was. And the next thing
that actually did happen was an assessment signed by a local
fellow. I don't know titles. Some of the IRS titles I found, I
can't equate them to the private sector, so they don't make
much sense to me. This was a fellow named Santambrogio who
signed an assessment against us and another fellow signed a
lean against us, the usual lien that you heard about this
morning. There went the credit; there went being able to be a
real estate broker; there went my estate, because, in general,
in partnership organizations where you get together with a few
people to invest in something, normally you have a clause in
there that if you incur a tax lien, Federal, State, something
like that, your partnership vanishes--for good reason. Nobody
wants to wake up in the morning and find the IRS in bed with
you as a partner, or the State revenue people. That is the
protection. My partnership interests vanished at the stroke of
a pen.
An appeals officer finally did surface, a very nice lady--
most of these people were very nice--with the position that
since we were already assessed, there was no point in
considering our appeal. Appeal dismissed. She made one
noteworthy statement: ``We have a `gotcha' for everything.'' I
remember that one.
The lien stopped my business. It didn't produce any income
to the Government.
I went to tax court to try to do something there and spent
what little money I had left. We got ready to go to court, and
one of the local IRS attorneys said, Oh, well, this case is not
going to court because TEFRA cases don't have a right to go to
tax court. They are streamlined into collection. I said, well,
Bill, this is not a TEFRA case, as you well know. He said, No,
but we are treating it as one. It started off as one, so we are
treating it as one.
I later learned that what he told me was not true. TEFRA is
an acronym for the 1986 Tax Code which was designed to catch
tax loopholes. That is where that term comes from.
However, this same fellow, one of the attorneys, along with
the auditor and another pro had suggested filing an amended
return. We did. It vanished. We never found a sign of it. I did
file a FOIA, Freedom of Information request. I had a little
better luck than you did, I believe. I got partial things out.
A lot of names were removed from memos, and I would get page 2
of a five-page memo and things like that. I got a little
information, and there was some reference to the amended tax
return and a reference to finding ways to just not process it.
And it was just not processed. I don't know where it is today.
It probably just isn't.
The next step, Denver District Counsel Neal Roberts, a very
excellent fellow, suggested I contact a Dave Christiansen in
the TEFRA office in Ogden, where this whole thing started. Mr.
Christiansen pulled my file over there, looked at it, said this
is ``off the wall,'' sent it back over here to Denver District
and requested that they reaudit, do this over again. Denver
District said no, we don't have time for that sort of thing.
Mr. Christiansen did that round trip again with the file and
back to Denver District, coming into a different person. Denver
doesn't report to Ogden, so he can't order it. He can only
suggest it. They both report, I think, to Dallas.
Again, Denver District said no, we are not going to reaudit
this.
That avenue closed, I filed an offer in compromise,
taxpayer not liable, using the exact code--well, the exact code
I quoted from the original auditor. He said this is not valid
because you cannot flow through because of--and I quoted the
code book and page--you cannot flow--even if the partnership,
which didn't have a profit, did have a profit, you can't flow
the taxes through from an S corporation to the owners of the
corporation.
A pretty good argument. It was never answered. The letter
that came back was from the same person who had signed the
assessment a couple of years beforehand, and his denial was a
one-page letter in which he stated the IRS had determined that
our workers were, in fact, employees and, therefore, we owed
the taxes.
Hello? Workers? We never had any workers. That wasn't the
subject. What is going on here? I assumed that he was mixing
this up with another case. I wrote him back politely and said I
think, you know, you have titled your letter to our case, but
you are answering somebody else's offer in compromise. Mr.
Santambrogio's letter came--a second letter came back, said no,
we find your workers are employees, therefore, you have got to
pay the tax.
Senator Campbell. Mr. Lesher, I hate to hurry you, but we
are going to have trouble fitting all of our panels in if we
run on.
Let me ask you, the letters you are talking about, did you
submit copies of those letters to the committee, too?
Mr. Lesher. No; but I can.
Senator Campbell. Would you please do that?
Mr. Lesher. Yes; everything I am saying here is--almost
everything is in letter form.
Senator Campbell. Anything you have a documentation of, we
would like to have.
Mr. Lesher. How about three large volumes?
Senator Campbell. That is good. Everything.
Mr. Lesher. That is pretty much the end of it. There are
lots of other colorful things. It still sits in that position.
I am doing other business now because I can't do what I was
very good at, one of the leading brokers here in town. An ex-
IRS attorney summed it up pretty well and made me feel actually
a little better about the whole thing, saying that there is
really nobody in the IRS whose job it is to fix messes, clean
up messes. And ours was obviously a mess. And anybody who stood
up and said, hey, look, we really screwed up on this Lesher's
return and audit and so on, let's get it fixed, would be a
marked man, really, kind of like a whistleblower. There is just
nobody that would dare do that. That makes sense.
One of the comments from--coming out of the offer in
compromise was that--and this was not given to me. This was a
private note that I got from a FOIA, Freedom of Information,
was that he thought that we had unreported income. A very bad
thing. So a new audit this past year with the lady going around
town to the Board of Realtors and places saying we are
investigating Mr. Lesher for unreported income and tax fraud.
Senator Campbell. Mr. Lesher, I have to remind you, we are
going to have to move on. We have to take set-up time for the
next panel.
Mr. Lesher. I am through. That ended finding nothing, and
that is where we stand at the moment. I tried to get them to
say we found nothing, but they wouldn't do it.
Prepared Statement
Senator Campbell. Mr. Lesher, we will insert your complete
statement in the record.
[The statement follows:]
Prepared Statement of Robert Lesher
I am Robert Lesher, 65, Denver resident 40 years, former Air Force
fighter pilot, long a real estate broker, investor in real estate
partnerships. By 1990 my ``estate,'' as it were, was made up of
interests in several investment property general partnerships with
other local investors, and I continued as a Realtor and commercial
broker.
January 1990, IRS auditor Eric Virkler contacted me, wanting to
audit my 1988 returns. He explained he was working an audit project for
the TEFRA office of the IRS's service center in Ogden, Utah. TEFRA is
an acronym referring generally to tax shelter partnerships, the so-
called tax-loopholes that Congress so loves to use to whip the public's
emotions. No partnership of mine had ever been a TEFRA partnership.
However, Mr. Virkler had blundered into a failed enterprise where we
had bought and tried to operate a home for the mentally handicapped,
here in Denver. The federal funds earmarked for that population were
sidetracked by Colorado Governor Romer into a new State bureaucracy,
the home failed, we lost out shirts, and the 119 mentally retarded
residents ended up on the street. We had to return the property to the
mortgage holder.
When Auditor Virkler arrived on the scene, my wife Peggy suffered a
severe stroke. However, Mr. Virkler was under some pressure to deliver
scalps and, while I was trying to get help care for my wife, he made
continuous demands, threats, phone calls, and such to get my immediate
attention to his cause. My wife has since died.
To get breathing room, I sought help from Problem Resolution
Officer Phil Blighton. He seemed sympathetic, told me to file a form
911 and he would try to help. Unfortunately, he said, the district was
all out of form 911's, so until they got some in, there was nothing he
could do--except mail me one when they arrived. Several months later
one came in the mail, I completed it and returned it to Mr. Blighton
the same day. He wrote that I had taken too much time completing the
Form 911, and that my request for help was therefore denied.
Mr. Virkler stated he had audited the partnership returns before
coming to me, as required by law. It turned out he had not, though to
speed things up he issued the partnership a no-action letter. The TEFRA
audit project needed as many scalps as soon as possible to show the
public that in theory they were beating up on the rich. We were
supposed to be the rich.
Mr. Virkler had revised partnership K-1's to show that my S
corporation, the partner in the care home, had a profit as a result of
the business failure, a not unusual IRS interpretation. In open
violation of tax code paragraph 108d7A he flowed the so-called debt-
relief income through the S Corp to our personal returns, and charged
us with all sorts of unpaid taxes, penalties, interest, high crimes and
misdemeanors.
In all this, Mr. Virkler was quite open about what he was doing in
accordance with, and in violation of code and regulations, and provided
me documentation on the side to support an appeal and wipe out this new
tax debt. He even helped me write an appeal that made sense. Also, he
pointed out, all we had to do was file an amended return employing a
form 8082, and the whole matter would go away.
As months went by, I heard nothing back from the appeal, and could
not even learn who had it, or where the appeals office might be. Then I
received notice that one Michael Santambrogio has filed an assessment
against us, followed by a general lien against all our property real
and personal. I tried to contact both these gentlemen by letter and
phone. Neither would answer nor return calls.
An appeals officer finally did surface, with the position that
since we were already assessed, there was no point in considering our
appeal. Appeal dismissed. She made one noteworthy statement regarding
the whole process: ``We have a gotcha for everything--whatever we want
to do, we can find a rule to support it.''
The lien stopped my real estate brokerage business and wiped out my
estate, as it were, though in so doing produced no income to the
government. A standard condition of private partnerships is that if any
partner incurs a tax lien, his interest in the partnership vanishes as
though it never existed. No one wants to wake up in morning to find the
IRS in his bed as a new business partner. The estate I had been
building for 20 years in the profession was wiped out forever by the
pen of one Phil Voss, who signed the lien.
We went to tax court, and spent what little money we had left
putting together our case for that in-house judiciary. Just before our
court date, the IRS' attorney, Bill Davis, advised us that TEFRA
matters had no right to go to tax court. But this is not a TEFRA case.
That's all right, we're treating it as one. Later I learned that what
Mr. Davis had told me was untrue, that in fact we could have proceeded
with tax court.
Mr. Davis, along with the auditor and another PRO had all suggested
filing an amended return, which we did at the same time, well within
the 3-year time limit. It vanished, and was never acted upon one way or
another. I found mention of it in unsigned memoranda acquired through a
Freedom of Information action, advocating finding some rule to disallow
it.
Denver District Counsel Neal Roberts suggested I contact one Dave
Christiansen, in the TEFRA office in Ogden, where this whole thing had
started. I did so. He called in the files, allowed that our case was,
``off the wall,'' and sent the files back to Denver District with a
request to reaudit. Denver District refused. Mr. Christiansen made the
same round trip a second time, and a second time was told to forget it.
That avenue closed, I filed an offer in compromise (taxpayer not
liable), an appeal of sorts generally unknown to the public. Though I
could have made a number of arguments, I made only one, what I
considered the simplest and more irrefutable, that the flow-through of
the bogus K-1 income was in violation of the tax code as sited. One
paragraph, with documentation.
The answer came back from, lo and behold, the same Michael
Santambrogio who had filed the premature assessment. His denial was a
one-page letter in which he stated that the IRS had determined our
workers were in fact employees therefore we owed the taxes.
Hello? Workers? What workers? I assumed the letter was mixed up
with another case, returned it to him with a polite note to that
effect. Not so. His second reply was the same as the first. Mr.
Santambrogio could find no way to refute my claim, so he faked a
different claim and ``answered'' that instead.
I wrote him again. He wrote back that he has talked to the person I
worked with in Ogden (Dave Christiansen), and their attorney in Denver
(Bill Davis) and that both agreed we owed the money, period. That of
course, did not answer the OIC, but was supposed to shut me up.
I called Dave Christiansen, who denied in writing expressing any
such opinion to any one, and denied ever talking with Mr. Santambrogio.
I called Bill Davis several times. He would not return my calls.
Dave Christiansen has since been reassigned by the IRS. I am unable
to learn of his whereabouts.
An admittedly fraudulent audit, an appeal and an amended return
ignored, the right to court denied, and the OIC process brushed aside
with lies.
Many friends have helped me survive after being put out of business
by the IRS process and my assets, my partnership interest, made
worthless. Yet in no way was my loss the government's gain. They simply
destroyed a productive, tax-paying businessman as a matter of their
normal course of business, not with any particular malice.
To close, an observation by an ex-IRS attorney summed it up pretty
well, and made me feel that this on-going nightmare was not my own
insanity. Sure our case is a mess, it is illegal, improper, and the IRS
has done almost everything wrong. However, no one at any level in the
IRS is going to stand up and say so unless he's ready to commit career
suicide. It's the same as being a whistle blower. No one in the IRS
would dare come out and say, ``Hey, we really screwed up on the
Leshers, and we need to correct that mess and let them live their lives
again.'' No one in the IRS would have the courage or the integrity to
do a thing like that.
With that reality check, nothing got fixed but I felt a lot better.
Need for Major Changes
Senator Campbell. Well, I appreciate your testimony. I have
to tell all of you that when I see grown men who have served in
the military, in the Korean War, as I have, by the way, Doctor,
and people who have seen their families come apart or lost
their homes, when I see, very frankly--I have been taking
notes, and I am sure the Commissioner has, too. But he is not
looking in your faces. He is beside you. But when I see tears
coming up in your eyes, I can understand the hopelessness that
some of you feel in dealing with the IRS, and there is no
question in my mind we have to make some major changes if we
are ever going to have the American public's confidence
restored in Government. It has to start with the agency that
takes their money.
I do appreciate you all being here, and with that, if you
have any additional comments you would like to turn in over the
next week or so, we will make sure they are included in the
record, too.
Panel 2
STATEMENTS OF:
DORIS MARTINEZ, FORMER IRS REVENUE AGENT, PRESIDENT, ASSOCIATED
TAX CENTRE, INC.
KENNETH TUCHMAN, FOUNDER AND PRESIDENT, TELETECH
Introduction of Witnesses
Senator Campbell. We will now go to panel 2, and that will
take about 5 minutes to set up: Dr. Doris Martinez and Mr. Ken
Tuchman, I believe it is pronounced. If you would come up and
get your equipment set up, we will just take about a 5-minute
break while we are doing that.
[A brief recess was taken.]
Senator Campbell. On this panel, there are only two people
testifying on this panel, so we will be able to go a few
minutes longer than the former panel. So we will start with Ms.
Martinez, if you would like to go ahead, and then we will
proceed with Ken Tuchman after Ms. Martinez.
Bring that microphone over directly from you.
Statement of Doris Martinez
Ms. Martinez. Senator, I would like to remind you that I am
hearing impaired, I am profoundly deaf, that and the fact that
I can't hear the words now. So today I have asked for some help
today with notetaking.
Senator Campbell. Sure. For the audience, Ms. Martinez said
she is hearing impaired, and she will need a little help, and
that is why other people are here with her. But you still need
to speak directly into that thing.
Ms. Martinez. OK. This is Frankie Bowie and Gary Gurhle and
Darla Espinosa will be joining us to help us with the
notetaking in just a few minutes. Here she is. OK.
With that, on behalf of Denver District taxpayers, I would
like to commend you, Senator Campbell, and the Treasury and
General Government Subcommittee for holding this most important
IRS field hearing, the purpose of which is to discuss----
Senator Campbell. Doris, you are still too far away from
the microphone.
Ms. Martinez [continuing]. The purpose of which is to
discuss ongoing restructuring issues and potential remedies.
With congressional action pending on H.R. 2676, we believe the
input offered today may be vital in considering certain
provisions. For those issues not yet on the table, perhaps
future legislation and changes to IRS procedure and policies
can provide much needed taxpayer protection and relief.
My name is Doris Martinez, and I am a former IRS agent,
Denver District, from 1977 to 1984. I have been in private
practice since 1987, and I am president of Associated Tax
Centre, a firm which specializes in handling IRS problem
situations. I have been profiled in articles by the Denver
Post, the Denver Business Journal, Accounting Today, and, along
with my partners, cohosted a radio talk show during the filing
season in 1996. Our topics focused on IRS tactics, abuses,
taxpayer rights, and responsibilities. I am an enrolled agent
and a member of the National Society of Accountants and
National Society of Enrolled Agents.
The testimony offered today is based on my experience and
knowledge gained as an IRS employee, taxpayer representative,
and humble taxpayer.
The issues brought to your attention are wide and varying,
but with a common theme: the need for equitable tax procedures
and laws, and equitable treatment of all taxpayers by an IRS
held accountable for its actions.
Taxpayer Advocate and Problem Resolution Program
Commissioner Rossotti has requested a $10 million increase
for the Taxpayer Advocate's Office and Problem Resolution
Program. Until the Office of the Taxpayer Advocate becomes
independent in all aspects, I believe Congress should
reconsider the request, deny it, or consider reduction or
elimination of the program altogether. The basis for taking
position is my experience in dealing repeatedly with the Denver
District Problem Resolution Office with consistently
unproductive results and information secured from the Tax
Analyst, a nonprofit watchdog organization.
According to documentation provided by the taxpayer
advocate and subsequently reported by the Tax Analyst, during a
recent 3-year period district problem resolution offices
handled over 121,000 requests for assistance. Only 82 taxpayers
received orders for relief. This is inefficiency at its worse.
At the district level, problem resolution officers have no
authority to compel action or provide relief. Their purpose is
to gather information and submit reports. When a taxpayer
submits a request for assistance, the problem resolution office
refers the case to the appropriate division and PRP caseworkers
work the case. In reality, these are IRS collection and
examination division personnel assigned to the PRP program.
These employees have the same attitudes and objectives as their
nonproblem resolution counterparts. The perspective that each
district has a taxpayer advocate field office is nothing more
than an illusion, a $34 million illusion.
Solution: H.R. 2676 does not go far enough in providing
taxpayers with an independent program with which to resolve
hardship cases or previously unresolved issues. An objective
problem resolution program is critical to effective taxpayer
relief. There is only one taxpayer advocate, and that position
is not autonomous. That is not enough.
Utilization of outside contractors using existing budgets
at the district level, specifically enrolled agents, CPA's, or
tax attorneys experienced in IRS matters, is a possible
solution. If we accept the premise that both IRS employees and
enrolled practitioners outside of the Service are following the
same Internal Revenue Code and operational directives contained
in the Internal Revenue Manual, then the issue of adversarial
relationships between an independent problem resolution office
and the IRS is nonexistent. Ultimately, we all answer to the
Secretary, Department of the Treasury.
Disparate Treatment of Minority Taxpayers
Our observation is that all taxpayers are not being treated
equally. African-American taxpayers are treated the worst, with
Hispanics running a close second. Examples of abuses are:
Insisting minority taxpayers liquidate their retirement
funds or sell their homes in predominately white, upscale
neighborhoods, when their nonminority counterparts are granted
generous installment agreements, leaving their assets intact.
Two, refusing to accept that Hispanic males are responsible
enough to secure custody of their children and support them,
thereby denying the earned income credit when it is rightfully
due. Statements made by Service Center employees include, ``We
know how you people cover up for each other.'' ``You people.''
In this situation, documents were requested from a single
Hispanic father and timely submitted. The affidavit was
provided by another Hispanic surnamed individual, the baby-
sitter. It was not good enough for the line employee. It took a
complaint to the manager to get the information accepted and
the earned income credit released.
In yet another instance, a revenue officer demanded a
family of five children, living at below poverty level, be
paraded in front of her and taken back to her work area so she
could question them without their father present. They were 5
to 15 years old. The revenue officer asked them who took care
of them, who cooked for them, where was their mother. Their
mother had left them, and the littlest one, the 5-year-old,
sleepy-eyed and somewhat disheveled, answered: ``My mommy
doesn't live with us anymore. She doesn't love us. My daddy and
my brother take care of me.'' I was there with them. These
children were forced to relive a traumatic and heart-breaking
event in their life in front of two strangers, the revenue
officer and me. All this, to put a taxpayer in currently not
collectible status. I don't see these types of demands put upon
nonminority taxpayers.
In May 1996, I received a call from a retired IRS tax
auditor from Fresno, CA. He wanted to know if I had noticed
that minority taxpayers were audited more frequently and
treated more harshly. This was his experience. He was concerned
and he was angry. Based on that call, my own experiences, and
recent findings by the GAO regarding earned income credit
issues and higher audits rates in States which have high
minority populations, it appears this is a national issue.
Solution: When a representative from the IRS discriminates
against a taxpayer, he or she not only insults the taxpayer,
but insults, me, you, the district director, the Commissioner,
and all Americans. The Service has EEO programs and rules which
are supposed to be enforced internally. Yet these very issues
still exist when dealing with the taxpayers, and they have no
place to go. I know of few alternatives when dealing with
racism. Zero tolerance for disparate treatment of taxpayers
under threat of discipline or loss of position should be a
Servicewide mandate. Other than that, there is only one way to
deal with racism and that is to confront it, confront it one
employee, one situation at a time. Responsive IRS management
which takes swift action to correct the taxpayer's problem and
discipline or fire the offending employee will result in a more
effective IRS. The solution does not come so much in the form
of a request, but it is rather a demand.
Secret Hit Lists and Actions Against Taxpayer Representatives
While a representative in the Denver District, I saw ``Hit
Lists of Problem Preparers.'' In October 1996, my partner and I
were advised by current and former IRS personnel that my firm
and I were on that list. In September 1997, a Denver District
branch chief, examination, denied I was on the list, but
verbally confirmed that the district passes a list around, and
during tax season solicits information from revenue agents to
find out who's giving them a bad time so they can put them on
the list and conduct surprise field compliance visits. This is
a document and a practice that, if an outsider asks, IRS
management will summarily deny exists. It is one of their dirty
little secrets. Use of this tactic is used to harass taxpayer
representatives and discourage representation.
I know of another taxpayer representative, also on this
dubious list, who has been pursued to the point of total
disruption of her business and family life. She is a meticulous
practitioner, but wound up on somebody's bad side at the IRS
while representing an audit or collection issue. Both she and
her clients have been put through grueling audits, most of
which have been largely unproductive.
I have mentioned my partner several times. His name was
Rudy Maestas. He is not here today because he died 18 months
ago. The Denver District had been pursuing us for several years
in a relentless and obsessive effort to disbar me or otherwise
put us out of business. There were times when we felt like the
wrath of 800 IRS employees was upon us and it was frightening
to the point where we feared for our lives. The reason for
pursuit? ``She has influence over taxpayers, she has influence
over further compliance, she is high profile and former IRS.
She doesn't meet the criteria for these actions, but pursue
her, anyway. Treat her like a tax protester.''
These statements, made by IRS officials, were found in
documents secured via the Freedom of Information Act. The FOIA
provided evidence of illegal snooping, forgery, falsified and
fabricated documents, and repeated districtwide disclosure
violations, among other things. The Denver District has
expended at least $500,000 and 4 years pursuing us, a pursuit
which is not yet over.
In the middle of all this, my partner Rudy became so upset,
so distraught, that he told me, his family, and friends that if
anything happened to him to look to the Denver District IRS as
the cause of his death, no matter what the circumstances. And
so today, Commissioner Rossotti and District Director Hutton, I
hold this district responsible for whatever you took off my
partner's life. Because I am profoundly deaf, I know what real
silence is like. And there is no sound which screams as loudly
in my ears as the silence of my partner no longer here. Rudy
was my partner and my best friend. In contributing to Rudy's
death, this district may have silenced his laughter, but you
have not silenced his voice, for today I speak for us both. His
death has broken my heart, but not my spirit.
Nevertheless, the question still remains: Despite repeated
complaints up to the regional level, why hasn't IRS management
asked to see my full documentation and pursued the issues? I
have offered the documentation more than once. Why haven't you
taken action against the guilty Service employees within this
district?
Solution: There are already laws, including the new illegal
snooping law, existing disclosure laws which hold IRS employees
accountable, the Privacy Act of 1974, and the Freedom of
Information Act, all meant to protect the taxpayer, not the
perpetuators at the IRS. Yet these laws remain largely
ineffective without an independent outside board with full
authority to investigate and take action. It is clear that the
IRS on its own is not capable of conducting full and objective
investigations, nor are they taking appropriate corrective
action.
Hit lists on problem preparers/practitioners are
unconstitutional, un-American, and in violation of the Privacy
Act. IRS employees who engage in this practice, encourage it,
perpetuate it, or stand by and do nothing should all be held
accountable and disciplined or fired.
The practitioners on these lists are entitled to know that
their rights have been violated, be given an opportunity to
file formal complaints, and provisions made for damages or
compensation to be paid without litigation. Use of mediators
would expedite the process and keep expenditures for all
parties to a minimum.
I am mindful of the concerns by Service employees that they
may be disciplined or fired without due process. While that is
not the suggestion, the current concerns of 58,000 IRS
employees should not supersede the concerns and welfare of 200
million American taxpayers and their representatives.
Abusive Audits and Lack of Due Process
There seems to be a growing pattern in which tax auditors
and revenue agents conduct audits which are malicious,
intrusive, and largely unproductive. Most of these audits could
be handled via correspondence using the computer matching
program. Many times audits shouldn't take place at all or are
concluded with grossly erroneous results. Examples:
A recent office audit was conducted on a Form 1040EZ with a
potentially omitted W-2 in the amount of $200. The tax auditor
attempted to do a lifestyle audit and demanded the taxpayer
provide copies of his parents' tax returns and Social Security
numbers. The audit was ultimately a no-change.
A 500-hour field audit, which included a national search
for assets, when, in fact, the audit could have been
accomplished via correspondence using the computer matching
program. Cost of the field audit exceeded $25,000. A
correspondence audit would have taken $2.50, postage included.
The continued practice of denying taxpayers the right to
protest unagreed issues, even when a taxpayer has specifically
stated he or she wants to protest, remains a problem. Every
time Service personnel deny someone the right to protest or
appeal, they contribute to the ever increasing problem of
taxpayer noncompliance. The hardest thing to do as a
representative is to convince a wronged taxpayer that the
system will work next time.
Solution: We should eliminate the majority of tax auditor
and revenue agent positions. These people clearly do not have
enough to do. Office and field audit procedures remain largely
archaic and are increasingly intrusive. The purpose of an audit
is to ensure that a return is substantially correct as filed,
nothing else. With computerization and the expansion of
information returns, most office and field audits are
unnecessary. Lifestyle audits must be limited to those
circumstances which are clearly developed after the initial
interview and basic audit procedures have been concluded. An
outside citizens oversight board should be responsible for
handling complaints, monitoring abusive practices, and holding
management and line employees accountable.
Penalty and Interest Abatements and Reform
All penalties contain provisions for abatement or refund if
there is reasonable cause. In short, the Internal Revenue Code
provides for our humanity. In reality, there is no parity as to
who receives abatements. It is easier to get a $100,000 penalty
abated for a corporation than it is to get a $200 penalty
removed for an individual. The smaller the taxpayer, the more
personal it gets, all the way down to whether or not that
taxpayer has ever sinned before.
Today we live in a more complex society in which divorce,
frequent moves, violent deaths, and all manners of bizarre
circumstances descend upon a person's life. Abatement
procedures and reasonable cause must be updated and expanded to
reflect our society. Frequently, taxpayers are erroneously told
they cannot request abatements until the full tax has been
paid. The current move to make notices more readable is to be
commended. We must go one step further and include with every
written notice of assessment and demand for payment a simple
instruction which allows the taxpayer to request abatement of
refunded penalties. The assessment or demand letter should
include space for the taxpayer's explanation of circumstances
and instructions to attach any relevant documentation they
would like considered.
H.R. 2676 contains a provision to suspend failure-to-pay
penalties so long as the taxpayer is making payments, but there
is no provision to suspend interest. Ongoing discussions
regarding the cost of abating penalties along with expanded
innocent-spouse provisions estimate the cost to be at more than
$5 billion. The cost of tax-related bankruptcies, which account
for up to one-third of all bankruptcies, and repeated
noncompliance could be avoided and would greatly reduce the $5
billion loss of revenue. Most taxpayers want to pay their
taxes. It is the penalties and interest which frustrate and
discourage them the most.
Solution: More realistic policy and abatement guidelines
which rely less on the whim of Service employees and are more
consistently applied are badly needed. Regardless as to whether
it is applied to tax or penalty, taxpayers can only pay so
much. Legislation providing for suspension of interest so long
as payments are being made should be considered.
Today the overall rate of noncompliance is 20 percent, up
from 5 percent in 1960. If we can reverse that trend by 1
percent by avoiding bankruptcies and encouraging taxpayer
compliance, at the current rate of payments processed by the
Internal Revenue Service in the amount of $1.7 trillion per
year, an additional $17 billion per year will be collected,
voluntarily. This will more than offset any losses due to
penalty, interest, or innocent-spouse reform.
Taxpayer Education and the Internal Revenue Code
The original Internal Revenue Code was 16 pages long.
Today's code contained over 500,000 words and is still growing.
The Taxpayer Relief Act of 1997 alone contains 800 amendments
and 300 new provisions. Was America sleeping when we let this
get by? To Congress, I say, What happened? And I would like to
show you the Internal Revenue Code, two volumes. The 1997
Taxpayer Relief Act, this is it by itself.
Senator Campbell. Do you have that memorized yet?
[Laughter.]
Ms. Martinez. I had to buy bifocals just to read this. To
Congress, I say, What happened? What happened?
Americans are obsessed with taxes, yet they don't
understand them. If you ask a junior-high student what the term
``under the table'' means, they can tell you. If you ask a
senior in high school what the term ``voluntary compliance''
means, they don't know. Tax education of the American public
stops with the Boston Tea Party. Yet every year we have new
taxpayers joining the system via the millions of teenagers who
enter the job market. I challenge the IRS to appropriate a
portion of their budget to truly educate the public and provide
a badly needed sense of history which is currently lacking in
the American taxpayer.
To Congress, I ask for a national taxpayer education
initiative. A child in the sixth grade is old enough to earn an
allowance. Start there. Send representatives, perhaps tax
auditors and revenue agents, to speak in our schools, from
elementary school up through high school. As a Nation, we must
start teaching taxation in history, math, and business courses.
But we must teach it. We are currently failing to educate our
young people about their rights and responsibilities.
Most Americans don't even know which President gave us the
prototype for the current IRS organization and our system of
taxation, nor do they know that the entire system was
completely dismantled not once but twice due to corruption. By
the way, the President who gave us the IRS was Abraham Lincoln
when he created the Bureau of Internal Revenue in 1862, which
was completely dismantled in 1872 and later resurrected in
1913. Prior to that, in 1801, Thomas Jefferson dismantled a
widely corrupt Federalist system of Internal Revenue, which had
been in place less than 10 years, and our country was funded
exclusively by the collection of customs duties until the Civil
War.
We send police officers, firemen, and other professionals
into our schools to give talks in classes and schoolwide
assemblies. Why not representatives from the Internal Revenue
Service? It is the one thing I would like to see in my
lifetime. This is how you avoid the necessity for audits and
installment agreements. You start at the beginning.
In summary, IRS, you are the trustees, the guardians of the
Internal Revenue Code. It is incumbent upon both management and
line employees at the IRS to treat all taxpayers with dignity
and parity, for you are the trustees, the guardians of the
Internal Revenue Code.
IRS. You must put integrity back into the ``I,'' for
corruption has many faces: lying, racism, retaliation, illegal
snooping, unnecessary intrusiveness, excessive collection
actions, hit lists, behaving like a secret society. Taxpayers
view all of these acts as corrupt.
I often hear people say with great hostility, ``How can you
work with the IRS? They are a bunch of lying crooks.''
As a former revenue agent, it hurts to hear that. Yet sad
to say, I have no quick rebuttal. Integrity throughout the
agency must be restored without delay.
IRS. The IRS must put respect back into the ``R,'' respect
for the taxpayer, respect for their rights and the system as it
was meant to be. Our taxation system contains a steady balance
between taxpayer rights and the authority granted to Service
employees. It is lack of respect for the taxpayers which is
giving rise to additional legislation as we speak. Respect is
one of those things which if you give it, it will be returned
to you as well.
IRS. The ``S'' must stand for solutions. Solutions for the
taxpayer which educate, encourage cooperation, and promote an
atmosphere which fosters voluntary compliance mean solutions
for everyone.
To Congress, we look forward to a continued commitment to
restructure the IRS and enact whatever legislation is necessary
to protect and further the interests of the taxpayer. To the
Internal Revenue Service, we welcome a newly invigorated
management which will hopefully inspire and guide the employees
who have been entrusted as stewards of the Internal Revenue
Code. And we look to the American people who, as taxpayers,
must continue their efforts with honesty, responsibility, and,
as always, in the spirit of voluntary compliance.
Prepared Statement
Senator Campbell. Thank you, Ms. Martinez. We have your
complete statement and it will be made part of the record.
[The statement follows:]
Prepared Statement of Doris Martinez
On behalf of Denver District Taxpayers, I would like to commend
Senator Nighthorse Campbell and the Postal/Treasury Subcommittee for
holding this most important IRS Field Hearing, the purpose of which is
to discuss on-going restructuring issues and potential remedies. With
Congressional action still pending on H.R. 2676 we believe the input
offered today may be vital in considering certain provisions. For those
issues not yet on the table, perhaps future legislation and changes to
IRS procedure and policies can provide taxpayer protection and relief.
My name is Doris Martinez and I'm a former IRS revenue agent,
Denver District, from 1977 to 1984. I've been in private practice since
1987 and am president of Associated Tax Centre, Inc., specializing in
handling IRS problem situations. I have been profiled in articles by
the Denver Post, The Denver Business Journal, Accounting Today and also
co-hosted a radio talk show during the filing season us 1996. Our
topics focused on IRS tactics, abuses, taxpayer rights and
responsibilities. I'm an enrolled agent and a member of the National
Society of Accountants and National Society of Enrolled Agents.
The testimony offered today is based on my experience and knowledge
gained as an IRS employee, taxpayer representative and humble taxpayer.
The issues brought to your attention are wide and varying, but with
a common theme--the need for equitable tax procedures and laws; and
equitable treatment of all taxpayers by an IRS held accountable for its
actions.
I. Taxpayer Advocate and Problem Resolution Program.--Commissioner
Rossotti has requested $10 million to the PRO budget. Until the Office
of the Taxpayer Advocate becomes independent in all aspects I believe
Congress should deny the request and consider reduction or elimination
of the program altogether. The basis for taking this position is my
experience in dealing repeatedly with the Denver District Problem
Resolution Office with consistently unproductive results and
information secured from the Tax Analyst, a non-profit watch dog
organization. According to documentation provided by the Taxpayer
Advocate and subsequently reported by the Tax Analyst, during a recent
three year period, District Problem Resolution Offices handled over
121,000 requests for assistance. Only 82 taxpayers received orders for
relief. This is inefficiency at its worse. At the District level,
Problem Resolution Officers have no authority to compel action or
provide relief. Their purpose is to gather information and submit
reports. When a taxpayer submits a request for assistance, the Problem
Resolution office refers the case to the appropriate Division and
Problem Resolution Program ``caseworkers'' work the case. In reality
these are IRS collection or examination division personnel, assigned to
the Problem Resolution Program. These employees have the same attitudes
and objectives as their non-Problem Resolution counterparts. Thus, the
perspective that each District has a Taxpayer Advocate field office is
nothing more than an illusion, a $40,000,000 illusion.
Solution: H.R. 2676 does not go far enough in providing taxpayers
with an independent program with which to resolve hardship cases or
previously unresolved issues. An objective Problem Resolution Program
is critical to effective taxpayer relief. There is only one Taxpayer
Advocate and that position is not autonomous. That is not enough.
Utilization of outside contractors using existing budgets at the
District level, specifically enrolled agents, CPA's or tax attorneys
experienced in IRS matters is a possible solution. If we accept the
premise that both IRS employees and enrolled practitioners outside of
the Service are following the same Internal Revenue Code and
operational directives contained in the Internal Revenue Manual, then
the issue of adversarial relationships between an independent Problem
Resolution Office and the IRS is non-existent. Ultimately we all answer
to the Secretary, Department of Treasury.
II. Disparate Treatment of Minority Taxpayers.--Our observation is
that all taxpayers are not being treated equally. African-American
taxpayers are treated the worst with Hispanics running a close second.
Examples of abuses are:
(1) Insisting minority taxpayers liquidate their retirement funds
or sell their homes in predominately white, upscale neighborhoods when
their non-minority counter-parts are granted generous installment
agreements, leaving their assets intact.
(2) Refusing to accept that Hispanic males are responsible enough
to secure custody of their children and support them, thereby denying
the Earned Income Credit when it is rightfully due. Statements made by
Service Center employees include ``we know how you people cover up for
each other.'' In this situation documentation was requested from a
single Hispanic father and timely submitted. The affidavit was provided
by another Hispanic surnamed individual, the baby sitter. It was not
good enough for the line employee. It took a complaint to the manager
to get the information accepted and the Earned Income Credit released.
(3) In yet another instance a revenue officer demanded a family of
five children, living at below poverty level, be paraded in front of
her and taken back to her work area so she could question them without
their father present. They were five to fifteen years old. The revenue
officer asked them who took care of them, who cooked for them, where
was their mother? Their mother had left them and the littlest one, the
five year old, sleepy eyed and somewhat disheveled answered ``my mommy
doesn't live with us anymore, she doesn't love us. My daddy and my
brother take care of me.'' I was there with them. These children were
forced to relive a traumatic and heart breaking event in their life in
front of two strangers, the revenue officer and me. All this, to put a
taxpayer in currently not collectible status. I don't see these types
of demands put upon non-minority taxpayers.
In May 1996 I received a call from a retired IRS tax auditor from
Fresno, California. He wanted to know if I had noticed that minority
taxpayers were audited more frequently and treated more harshly. This
was his experience. He was concerned and angry. Based on that call, my
own experiences and recent findings by the GAO regarding Earned Income
Credit Issues it appears this is a national issue.
Solution: When a representative from the IRS discriminates against
a taxpayer he/she not only insults the taxpayer, but insults me, you,
the District Director, the Commissioner and all Americans. The Service
has EEO programs and rules which are supposed to be enforced
internally. Yet these very issues still exist when dealing with
taxpayers, and they have no place to go. I know of few alternatives
when dealing with racism. Zero tolerance for disparate treatment of
taxpayers under threat of discipline or loss of position should be a
Service wide mandate. Other than that there is only one way to deal
with racism and that is one employee, one situation at a time.
Responsive IRS management which takes swift action to correct the
taxpayer's problem and counsel, discipline or fire the offending
employee will result in a more effective IRS. This solution does not
come so much in the form of a request but rather a demand.
III. Secret Hit Lists and Actions Against Taxpayer
Representatives.--While a representative in the Denver District, I saw
``Hit Lists of Problem Preparers.'' In October 1996 my partner and I
were advised by current and former IRS personnel that my firm and I
were on that list. In September 1997 a Denver District Branch Chief,
Examination, verbally confirmed that the District ``passes lists
around, and during tax season solicits information from revenue agents
to find out who's giving them problems so they can put them on the list
and conduct surprise field compliance visits.'' This list is a document
and practice that if an outsider asks IRS management will summarily
deny exists. It is one of their dirty little secrets. Use of this
tactic is used to harass taxpayer representatives and discourage
representation.
I know of another taxpayer representative, also on this dubious
list, who has been pursued to the point of total disruption of her
business and family life. She is a meticulous practitioner, but wound
up on someone's bad side at the IRS while representing an audit or
collection issue. Both she and her clients have been put through
grueling lifestyle audits, all of which have been largely unproductive.
I've mentioned my partner several times. His name was Rudy Maestas.
He's not here today because he died in October 1996. The Denver
District had been pursuing us for several years in a relentless and
obsessive effort to disbar me or otherwise put us out of business.
There were times when we felt like the wrath of 800 IRS employees was
upon us and it was frightening to the point where my family feared for
my life. The reason for pursuit? ``She has influence over taxpayers,
she's high profile and former IRS.'' These statements made by IRS
officials, were found in documents secured via the Freedom of
Information Act. The FOIA (Freedom of Information Act) documents
provided evidence of illegal snooping, forgery, falsified and
fabricated documents and repeated District wide disclosure violations,
among other things. The Denver District has expended at least $500,000
and four years pursuing us, a pursuit which is not yet over.
In the middle of all of this, Rudy became so upset, so distraught
that he told me, his family and friends, that if anything happened to
him to look to the Denver District IRS as the cause of his death. He
dropped dead from a heart attack a month later. He was 47 years old.
And so, today Commissioner Rossotti and District Director Hutton, I
hold this District responsible for whatever you took off my partner's
life. Because I'm profoundly deaf, I know what real silence is like.
And there is no sound which roars as loudly as the silence of my
partner no longer here. Rudy was my partner and best friend. In
contributing to Rudy's death this District may have silenced his
laughter, but you have not silenced his voice, for today I speak for us
both. His death has broken my heart, but not my spirit.
The question still remains though, despite repeated complaints up
to the Regional level, why hasn't IRS management asked to see my full
documentation? It has been offered more than once. Why haven't you
taken action against the guilty parties?
Solution: There are already laws, including the new illegal
snooping law, existing disclosure laws which hold IRS employees
accountable, the Privacy Act of 1974 and the Freedom of Information
Act, all meant to protect the taxpayer, not the perpetuators at the
IRS. Yet these laws remain largely ineffective without an independent
outside board with full authority to investigate and take action. It is
clear the IRS on its own, is not capable of conducting full and
objective investigations nor are they taking appropriate corrective
action.
``Hit lists'' on problem preparers/practitioners are
unconstitutional and in violation of the Privacy Act. IRS employees who
engage in this practice, encourage it, perpetuate it or stand by and do
nothing should all be held accountable and be disciplined or fired.
The practitioners on these lists are entitled to know that their
rights have been violated, be given an opportunity to file formal
complaints and provisions made for damages or compensation to be paid
without litigation. Use of mediators would expedite the process and
keep expenditures for all parties at a minimum.
I am mindful of the concerns by Service employees that they may be
disciplined or fired without due process. While that is not the
suggestion, it does not seem reasonable that the concerns of 58,000 IRS
employees should not supersede the concerns and welfare of 200,000
million American taxpayers and their representatives.
IV. Abusive Audits and Lack of Due Process.--There seems to be a
growing pattern in which tax auditors and revenue agents conduct audits
which are malicious, intrusive and largely unproductive. Most of these
audits could be handled via correspondence utilizing the computer
matching program. Many times audits shouldn't take place at all or are
concluded with grossly erroneous results. Examples:
(1) A recent office audit was conducted on a Form 1040EZ with a
potentially omitted W-2 in the amount of $200. The tax auditor
attempted to do a lifestyle audit and demanded the taxpayer provide
copies of his parents tax returns and social security numbers. The case
was a no change.
(2) A 500 hour field audit which included a national search for
assets when in fact the audit could have been accomplished via
correspondence using the computer matching program. Cost of the field
audit exceeded $25,000. A correspondence audit would have taken $2.50,
postage included.
(3) The continued practice of denying taxpayers the right to
protest unagreed issues, even when a taxpayer has specifically stated
he/she wants to protest, remains a problem. Every time Service
personnel deny someone the right to protest or appeal, they contribute
to the ever increasing problem of taxpayer non-compliance. The hardest
thing to do as a representative is to convince a wronged taxpayer that
the system will work the next time.
Solution: We should eliminate the majority of tax auditor and
revenue agent positions. These folks clearly do not have enough to do.
Office and Field audit procedures remain largely archaic and are
increasingly intrusive. The purpose of an audit is to ensure that a
return is substantially correct as filed. With computerization and the
expansion of information returns, most office and field audits are
unnecessary. Lifestyle audits must be limited to those circumstances
which clearly develop after the initial interview and basic audit
procedures have been concluded. An outside citizens oversight board
should be responsible for handling complaints, monitoring abusive
practices and holding management and line employees accountable.
V. Penalty and Interest Abatements/Reform.--All penalties contain
provisions for abatement or refund if there is reasonable cause. In
short, the Internal Revenue Code provides for our humanity. In reality
there is no parity as to who receives abatements. It's easier to get a
$100,000 penalty abated for a corporation than it is to get a $200
penalty removed for an individual. The smaller the taxpayer the more
personal it gets, down to whether or not that taxpayer has ever sinned
before.
Today we live in a more complex society in which divorce, frequent
moves, violent deaths and all manners of bizarre circumstance descend
upon a person's life. Abatement procedures and reasonable cause must be
updated and expanded to reflect our society. Frequently taxpayers are
erroneously told they cannot request abatements until after the full
tax has been paid. The current move to make notices more readable is to
be commended. We must go one step further and include with every
written notice of assessment and demand for payment a simple
instruction for requesting abatements of penalties with space for the
taxpayer's explanation of circumstances and instructions to attach any
relevant documentation they would like considered.
H.R. 2676 contains a provision to suspend failure to pay penalties
so long as the taxpayer is making payments, but there is no provision
to suspend interest. On going discussions regarding the cost of abating
penalties along with expanded innocent spouse provisions, estimate the
cost to be at more than $5 billion. The cost of tax related
bankruptcies, which account for up to a third of all bankruptcies, and
repeated non-compliance could be avoided and would greatly reduce the
$5 billion loss of revenues. Most taxpayers want to pay their taxes. It
is the penalties and interest which frustrate and discourage them the
most.
Solution: More realistic policy and abatement guidelines which rely
less on the whim of Service employees and are applied consistently, in
addition to reform of innocent spouse laws are badly needed. Regardless
as to whether it's applied to tax or penalty, taxpayers can pay only so
much. Legislation providing for suspension of interest so long as
payments are being made should also be considered.
VI. Taxpayer Education and the Internal Revenue Code.--The original
Internal Revenue Code was 16 pages long. Today's Code contains over
500,000 words and is still growing. The Taxpayer Relief Act of 1997
alone contains 800 amendments and 300 new provisions. Was America
sleeping when we let this get by? To Congress I say what happened?
Americans are obsessed with taxes, yet they don't understand them.
If you ask a junior high student what the term ``under the table''
means, they can tell you. If you ask a senior in high school what the
term ``voluntary compliance'' means, they don't know. Tax education of
the American public stops with the Boston Tea Party. Yet every year we
have new taxpayers joining the system via the millions of teenagers who
enter the job market. I challenge the IRS to appropriate a portion of
their budget to truly educate the public and provide a badly needed
sense of history which is currently lacking in the American taxpayer.
To Congress I ask for a National Taxpayer Education Initiative. A child
in the 6th grade is old enough to earn an allowance. Start there. Send
representatives, perhaps tax auditors and revenue agents, to speak in
our schools, from elementary school up through high school. As a nation
we must start teaching taxation in history, in math or business
courses--but we must teach it. We are currently failing to educate our
young people about their rights and responsibilities.
Most Americans don't know which President gave us the prototype for
the current IRS organization, and our system of taxation, nor do they
know that the entire system was completely dismantled not once but
twice due to corruption. By the way, the President who gave us the IRS
was Abraham Lincoln when he created the Bureau of Internal Revenue in
1862, which was completely dismantled in 1872 and later resurrected in
1913. Prior to that, in 1801 Thomas Jefferson dismantled a widely
corrupt Federalist system of Internal Revenue, which had been in place
less than 10 years, and our country was funded exclusively by the
collection of Customs Duties until the Civil War.
We send police officers, firemen and other professionals into our
schools to give talks in classes and in school wide assemblies. Why not
representatives from the IRS? It is the one thing I would like to see
in my lifetime. This is how you avoid the necessity for audits and
installment agreements. You start at the beginning.
VII. Summary--IRS, you are the trustees, the guardians of the
Internal Revenue Code.--It is incumbent upon both management and line
employees at the IRS to treat all taxpayers with dignity and parity,
for you are the trustees, the guardians of the Internal Revenue Code.
IRS. You must put integrity back Into the ``I,'' for Corruption has
many faces; lying, racism retaliation, illegal snooping, unnecessary
intrusiveness, excessive collection actions, hit lists, behaving like a
secret society. Taxpayers view all of these acts as corrupt. I often
hear people say with great hostility, ``How can you work with the IRS,
they are a bunch of lying crooks.'' As a former revenue agent, it hurts
to hear that, yet sad to say I here no quick rebuttal. Integrity
throughout the agency must be restored without delay. IRS. The IRS must
put respect back into the ``R'', respect for the taxpayer, respect for
their rights and the system as it was meant to be. Our taxation system
contains a steady balance between taxpayer rights and the authority
granted to Service employees. It is lack of respect for the taxpayers
which is giving rise to additional legislation as we speak. Respect is
one of those things which if you give, it will returned to you as well.
IRS. The ``S'' must stand for Solutions. Solutions for the taxpayer
which educate, encourage cooperation and promote an atmosphere which
fosters voluntary compliance mean solutions for everyone.
To Congress, we look forward to a continued commitment to enact
whatever legislation is necessary to protect and further the interests
of the taxpayer. To the IRS we welcome a newly invigorated management
which will hopefully inspire and guide the employees who have been
entrusted as stewards of the Internal Revenue Code. And we look to the
American people who as taxpayers must continue our efforts with
honesty, responsibility and as always in the spirit of voluntary
compliance.
Antibrowsing Bill
Senator Campbell. That was a very detailed and well-spoken
testimony. Bashing the IRS has become almost a national
pastime, as you probably know, and I was particularly
interested in your testimony because you offered a number of
suggestions and solutions.
Let me get a couple of things first, though. You mentioned
one audit, and as I did some quick arithmetic up here--Ricardo
did it for me--you were saying basically that one audit cost
500 hours in time and $25,000 to collect $200. Is that correct?
Ms. Martinez. The audit is currently under progress. I
computed that 500 hours--does anybody have a calculator here? I
believe I used a $50-per-hour rate on that.
Senator Campbell. I see. OK.
Ms. Martinez. Man-hours. So that is 500 hours. Totally
unnecessary. They could have done it via the computer matching
program. I guess my question is: What are we doing with the
computerization program? What is the purpose of all these
1099's?
Senator Campbell. Well, we ask the Commissioner.
Ms. Martinez. They are designed to save money. We are not
doing it.
Senator Campbell. You also alluded to what you called the
snooping bill. We call it the browsing bill, the antibrowsing
bill. In fact, it was my bill that was passed last year when a
number of IRS people were caught browsing with no probable
cause through the tax returns of sometimes family, sometimes
famous movie stars or athletes, sometimes just their enemies.
Before we passed that bill, it was already illegal to use
that information, but it wasn't illegal just to do the
snooping. That is now. Unfortunately, it is only a misdemeanor,
but at least it is illegal.
You also spoke about a number of documents. If you have
those on file--I noticed your testimony was very complete. If
you would give the committee a copy of all that documentation
that you accumulated, I would like to include that in the
record, too.
And I was particularly interested in your comments about
educating people about taxes, how it came about, that we have
to accept this responsibility. That is all great. But you spoke
mostly about the schools and youngsters, but they are not the
ones who pay their taxes. It is their parents.
How would you suggest we educate the adults, the ones that
are actually paying the taxes?
Ms. Martinez. I believe the media can be a big help in that
regard. We see all kinds of television spots and commercials on
don't do drugs, antiviolence. Television, radios, and newspaper
public service announcements can help the rest of us get caught
up and help us to become better taxpayers and make compliance
just a little easier.
Senator Campbell. OK. I thank you very much for your
testimony.
Now we will go to Kenneth Tuchman, and I apologize not
recognizing you at first, but I remember now meeting you
several times in Washington. Thank you for appearing today. If
you would like to go ahead and proceed?
Statement of Kenneth Tuchman
Mr. Tuchman. Good morning, Mr. Chairman. My name is Kenneth
Tuchman. I am the founder and president of TeleTech Holdings,
the Nation's leading provider of outsourced customer care
management services. I would like to thank you and the
committee for providing me with the opportunity to testify here
today.
While I can't offer solutions to all of the serious
problems so well expressed by the last panel, I hope that I can
shed some light on some exciting opportunities the IRS might
pursue to enhance your customer care capabilities.
To do so, I would like to outline TeleTech's partnership
with the U.S. Postal Service and describe the benefits that we
believe our public-private partnership has brought to this
public institution. In addition, I would like to explain why
private sector companies such as TeleTech can bring new
technology and innovative solutions to other Government
entities, including the Internal Revenue Service.
Americans, regardless of their perspective on the scope of
Government, expect public agencies to serve the citizens of our
country as effectively as possible. Without a doubt, this is
the goal of our Nation's dedicated public work force as well.
We believe that the experience and core competencies of
TeleTech and other similar firms in servicing customers in the
private sector is applicable to servicing public sector
customers as well.
First, I would like to provide some background on TeleTech
to give our partnership with the Postal Service some
perspective. I founded TeleTech in 1982 with one goal: To
provide outsourced customer care solutions to corporations and
corporation-like entities.
What is driving the need for business today? Well, to begin
with, customers are less loyal, more demanding, than ever
before. They measure service excellence in ways dramatically
different than they did just a few years ago. They point and
click to find information, shop freely at 4 a.m., and expect
instantaneous responses to even the most complex questions.
Today, the information age is affecting every aspect of a
company's ability to acquire, keep, and manage customers.
TeleTech serves the customer care management needs of large
global companies such as GTE, Microscoft, AT&T, United Parcel
Service, to name a few. All of our clients have one thing in
common: They have a strategic and competitive need for customer
service excellence. Yet because creating a best-in-class
customer care operation requires vast capital resources, ever-
changing technology, and a whole new infrastructure, they
choose to outsource the function to companies like TeleTech.
Clients create and implement customized strategies that
combine the best of our abilities with theirs. While strategies
for each client differ significantly, one goal is always the
same: Customer satisfaction that translates into long-term
customer relationships. Our clients know that over the long
run, satisfied customers mean greater competitive strength,
increased efficiency, and certainly reduced overall costs.
It is our view that this approach translates well into the
public sector. Ideally, public sector institutions would focus
on long-term relationships with their citizen-customers based
on satisfaction and responsiveness, which can only come from
single interaction resolutions to even complex inquiries. Over
the long run, this would not only improve their cost structure
and revenue collection capabilities due to efficiencies gained,
it would also enhance their image. Perhaps most importantly, it
would enable them to deliver what citizens are entitled to
expect: Expeditious, responsive, and effective interactions
with Government entities that serve them.
As you will see, this approach is enhancing the Postal
Service's ability to deliver just that to its customers.
The most relevant example of benefits of a partnership
between the public and private sectors can be found in our
Denver National Service Center where 600 TeleTech employees
manage 65,000 customer inquiries for the U.S. Postal Service
every day.
In 1996, TeleTech responded to a Postal Service request for
proposal. After a rigorous competitive bidding process, we were
awarded the contract in September of that year to establish the
first of six national service centers. Prior to the
establishment of this network of national service centers,
whenever the American public called the U.S. Postal Service,
calls were directed to their local post office. Often this
meant that calls were simply unanswered as local staff were
busy at the counter or simply did not have the tools or
information to be able to answer specific inquiries. This
reflected poorly on the Postal Service's commitment to
universal service for all.
TeleTech began handling calls for the USPS Pacific and
Colorado region on November 28, 1996. We have managed this
program during regular seasons and throughout the peak-season
volumes experienced during Christmas as well as during tax
seasons. We have established a separate subsidiary with
dedicated management and staff whose only duty and
responsibility is serving the U.S. Postal Service and its
customers.
This has been a successful partnership which has married
the best of the private and public sectors. Together, we have
established what is in my opinion one of the world's finest
examples of best-in-class customer care. TeleTech could not
have achieved this result on its own, and neither, I would
suggest, could the U.S. Postal Service. This level of
performance, in such a short timeframe, is achieved only
through an open, honest partnership.
Upon this bedrock, TeleTech and the Postal Service have
built solutions to deliver across-the-board service level
improvements, ensuring that the American public's calls are
answered accurately every day of the week, 24 hours a day. We
work together to constantly improve the quality of our work,
meeting frequently not only with our corporate counterparts at
the USPS but also with local post office staff, to ensure that
our definition of quality is one and the same. This attention
to detail will lead to overall improvement in customer service
ratings for the entire organization.
Because TeleTech provides the people, processes,
management, and undiluted focus on delivering world-class
customer care, while the Postal Service provides the
infrastructure and capital, our partnership allows the Postal
Service to focus on doing what it does best: Delivering the
mail. Simultaneously, the Postal Service is able to greatly
improve both the service levels and accessibility Americans
experience in interacting with this Government institution. In
many ways, our partnership is helping to break down the
invisible barriers that many Americans perceive stand between
themselves and the public organizations that serve them.
I believe that there are many areas of emulation in our
successful public-private partnership with USPS that might be
applicable to new approaches for the IRS.
We all recognize the challenges faced by the IRS and
applaud the commitment of its dedicated employees to deliver
quality service. Sometimes, however, it is simply not enough to
strive for excellence when the tools provided obstruct your
ability to deliver accurate information to average taxpayers.
It has been well documented that the current IRS computer and
information delivery systems are the source of many service
failures. In short, although IRS employees work long hours and
are both dedicated and professional, structural and
technological deficiencies hinder their efforts, resulting in
inconsistent service quality and frustration for millions of
taxpayers across our Nation.
I know that the IRS is taking steps to address this
technology deficiency with their current tender for a prime
contract and the announced short list of Lockheed Martin and
Computer Sciences Corp., both excellent companies. The enormity
of this project is mind-boggling. I wish Mr. Rossotti and his
team the very best and welcome the agency's renewed commitment
to providing employees with the tools they need to deliver the
kind of service we taxpayers demand.
However, when reviewing large-scale technology projects of
this nature, I immediately think of the individuals who answer
the phone--the people who are providing the human face of the
agency. Technology is never a magic bullet. The human interface
is clearly a crucial element in reinventing the IRS.
In the headlong rush to provide innovative technology, the
customer service agent is often the last to be considered, and
in many cases, this results in alienation and distrust on the
front lines. And despite all technology improvements and money,
the implementation fails to meet its objectives.
But it need not be so.
The typical customer service agent answers up to 25 calls
per hour 8 hours a day. This is a tough job. To enact change in
this environment without impacting morale is not easy, and
waiting 3 to 4 years for the technology fix to arrive is
clearly not an option.
The impact of technology in a customer service environment
can be dramatic, but it is also possible to make dramatic
changes to current processes--to apply short-term fixes, if you
will, which can provide immediate service improvements. We
would propose such a solution for the IRS, one that
incorporates the people side of the equation.
My suggestion is to blend the best of the private and
public sector, establishing a private sector test-bed
communication center, which would serve as a laboratory for
innovative process change. Let new ideas and processes be first
tested in an environment which embraces change. Once these
innovations have been demonstrated to work and are successful,
export them to every IRS communication center and quickly
improve the effectiveness of the entire enterprise. Because the
changes tested here will affect them the most, it may make
sense that current IRS employees actually staff this center.
In one sense, the establishment of such a center is
business consulting in its purest form. Because your private
sector partner would be in the trenches with your staff,
suggestions for improvement can immediately be tested, proven,
and implemented. Let the private sector see and feel some of
the burden carried out by the frontline staff of the IRS.
The goals of this type of outsourcing partnership are
similar to those you are undertaking now: Rapid improvement
without losing the knowledge and commitment of current staff.
Finally, I submit that this private sector communication
center could also serve as the test bed for the new technology
systems that are to be delivered under the current IRS prime
contract for technology. It would be important to separate this
initiative from the larger technology development effort, using
it exclusively as an independent testing center.
Although the private sector is different from the public
sector, one basic principle remains the same: Our client's core
competency is not customer service. When a large institution's
core competency is not customer service but desires for such
competency exists, such as with the IRS, it only makes sense
that that institution seek the assistance of a company whose
only focus is customer service. In such instances, public-
private partnerships are ideal.
Customer service companies such as TeleTech have succeeded
with such arrangements for a wide range of companies. For
example, TeleTech provides Microscoft with technical support,
product support, and registration of all of its products. We
also provide the United Parcel Service with tracing and
tracking of virtually all of their packages. We also provide
GTE with service on local, long-distance, Internet, and
wireless service, just to name a few examples. In addition to
the IRS, we believe that similar services can be provided to
other Government bureaucracies as well. Solutions are inherent
in partnerships.
TeleTech is proud of its partnership with the Postal
Service and is excited about innovation at the IRS. We hope our
fully customer-centric approach, technology- and people-based
solutions can be of help to this committee as you explore
changes at the IRS. Together, we believe there is a real
reinvention potential.
I want to reiterate my personal commitment to make myself
or my employees available to help your efforts in any way.
Thank you, Mr. Chairman, for inviting me to be a part of this
important process.
Prepared Statement
Senator Campbell. Thank you, Mr. Tuchman. We have your
complete statement and it will be made part of the record.
[The statement follows:]
Prepared Statement of Kenneth Tuchman
introduction
Mr. Chairman, I am Kenneth Tuchman, founder and President of
TeleTech Holdings Incorporated, the nation's leading provider of
outsourced customer care management services. I would like to thank you
and the Committee for providing me the opportunity to testify here
today.
I hope I can shed some light on some exciting solutions and
opportunities the IRS might pursue to enhance your customer care
capabilities. To do so, I'd like to outline TeleTech's partnership with
the United States Postal Service and describe the benefits that we
believe our public-private partnership has brought to this venerable
public institution. In addition, I would like to explain why a private
sector company such as TeleTech can bring new technology and innovative
solutions to other well-established government entities, including the
Internal Revenue Service.
Americans, regardless of their perspective on the scope of
government, expect public agencies to serve the citizens of our country
as effectively as possible. Without a doubt this is the goal of our
nation's dedicated public work force as well. We believe that the
experience and core competencies of TeleTech and other similar firms
serving customers in the private sector is applicable to servicing
public sector customers as well.
teletech's background
First, I'd like to provide some background on TeleTech to give our
partnership with the Postal Service some perspective. I founded
TeleTech in 1982 with one goal: to provide outsourced customer care
solutions to corporations and corporate-like entities. Today, TeleTech
serves the customer care management needs of large global companies
such as GTE, Microsoft, AT&T, and UPS. All of our clients have one
thing in common; they have a strategic and competitive need for
customer service excellence. Yet because creating a best-in-class
customer care operation requires vast capital resources, ever-changing
technology and whole new infrastructures, they choose to outsource the
function to companies like TeleTech.
In essence, we help our clients acquire, serve and retain their
customers by managing inbound telephone, Internet and PC-based video
inquiries on their behalf.
More specifically, TeleTech has 18 customer communication centers
located throughout the United States, United Kingdom, Australia, New
Zealand, Mexico and Canada. These centers have over 7,100 state-of-the-
art computer workstations, which are used by greater than 9,000 highly
trained customer care professionals in managing millions of customer
inquiries even week.
We invest a great deal in our front line employees, who represent a
wide range of experience and talents, from entry level customer service
personnel to senior technical support specialists and registered
nurses. We empower our employees with cutting-edge training and the
latest desktop tools for delivering world-class customer care.
Every industry is different, and therefore, customer service firms
like TeleTech perform unique services for every company we serve. In
each instance, we help our clients create and implement customized
strategies that combine the best of our abilities with theirs. While
strategies for each client differ significantly, one goal is always the
same: customer satisfaction that translates into long-term customer
relationships. Our clients know that over the long run, satisfied
customers mean greater competitive strength, increased efficiency and
certainly reduced costs.
It is our view that this approach translates well into the public
sector. Ideally, public sector institutions would focus on long-term
relationships with their citizen-customers based on satisfaction and
responsiveness. Over the long run, this would not only improve their
cost structure because they become more efficient, it would also
enhance their image. Perhaps most importantly, it would enable them to
deliver what citizens are entitled to expect: expeditious, responsive
and effective interactions with the government entities that serve
them.
As you'll see, this approach is enhancing the Postal Service's
ability to deliver just that to its customers.
teletech's partnership with the united postal service
The most relevant example of the benefits of a partnership between
the public and private sector can be found in out Denver East facility,
where 600 TeleTech employees manage customer inquiries for the United
States Postal Service every day.
In 1996, TeleTech responded to a Postal Service Request for
Proposal. After a rigorous competitive bidding process, we were awarded
the contract in September of that year to establish the first of six
National Service Centers. Prior to the establishment of this network of
National Service Centers, whenever the American Public called the USPS
their calls were directed to their local post office. Often this meant
that calls were simply unanswered as the local staff were busy at the
counter, or simply did not have the tools or information to be able to
answer specific inquiries. This reflected poorly on the USPS's
commitment to universal service for all.
TeleTech began handling calls for the USPS Pacific and Colorado
region on November 28, 1996, including the peak volumes experienced at
Christmas and during tax season. We have established a separate
subsidiary with dedicated management and staff whose only duty and
responsibility is serving the USPS and its customers.
This has been a successful partnership which has married the best
of the private and public sectors. Together, we have established what
is in my opinion one of the finest examples of a best-in-class customer
communication center in the world. TeleTech could not have achieved
this result on its own and neither, I would suggest, could the U.S.
Postal Service. This level of performance, in such a short time frame,
is achieved only through an open, honest partnership.
Upon this bedrock, TeleTech and the USPS have built solutions to
deliver across-the-board service level improvements, ensuring that the
American public's calls are answered accurately every day of the week,
24 hours a day. We work together constantly to improve the quality of
our work, meeting frequently not only with our corporate counterparts
at the USPS but also with local post office staff, to ensure that our
definition of quality is one and the same. This attention to detail
will lead to an overall improvement in customer service rates for the
whole organization.
Because TeleTech provides the people, processes, infrastructure,
technology management and undiluted focus on delivering world class
customer care, our partnership allows the Postal Service to focus on
doing what it does best: delivery the mail. Simultaneously, the Postal
Service is able to greatly improve both the service levels and
accessibility Americans experience in interacting with this government
institution. In many ways, our partnership is helping to break down the
invisible barriers that many Americans perceive stand between
themselves and the public organizations that serve them.
I believe there are many areas of emulation in our successful
public-private partnership with the USPS that might be applicable to a
new approach for the IRS.
irs challenges
We all recognize the challenges faced by the IRS and applaud the
commitment of its dedicated employees to deliver quality service.
Sometimes, however, it is simply not enough to strive for excellence
when the tools provided obstruct your ability to deliver accurate
information to the average taxpayer. It has been well documented that
the current IRS computer and information delivery systems are the
source of many service failures. In short, although IRS employees work
long hours and are both dedicated and professional, structural and
technological deficiencies hinder their efforts, resulting in
inconsistent service quality and frustration for millions of taxpayers
across our nation.
I know that the IRS is taking steps to address this technology
deficiency with their current tender for a Prime Contract, and the
announced short-list of Lockheed Martin and Computer Sciences
Corporation, both excellent companies. The enormity of this project is
mind boggling. I wish Mr. Rossotti and his team the very best, and
welcome the agency's renewed commitment to providing employees with the
tools they need to deliver the kind of service we taxpayers demand.
However, when reviewing large scale technology projects of this
nature, I immediately think of the individuals who answer the phone--
the people providing the human face of the agency. Technology is never
a magic bullet. The human interface is clearly a crucial element
reinventing the IRS.
In the headlong rush to provide innovative technology, the Customer
Service Agent is often the last to be considered. In many cases this
results in alienation and distrust on the front-lines, and despite all
technology improvements and money, the implementation fails to meet its
objectives.
But it need not be so.
The typical customer service agents answer up to 25 calls per hour
eight hours a day--this is a tough job. To enact change in this
environment without impacting morale is not easy and waiting three to
four years for the technology fix to arrive is not an option.
The impact of technology in a customer service environment can be
dramatic, but it is also possible to make dramatic changes to current
processes--to apply short-term fixes if you will--which can provide
immediate service improvements. We would propose such a solution for
the IRS, one that incorporates the people side of the equation.
My suggestion is to blend the best of the private and public sector
establishing a private sector test-bed taxpayer communication center,
which would serve as the laboratory for innovative process changes. Let
new ideas and processes be first tested in an environment which
embraces change. Once these innovations have been demonstrated to work
and are successful, export them to every IRS call center and quickly
improve the effectiveness of the entire enterprise. Because the changes
tested here will affect them the most, it may make sense that current
IRS employees staff this center.
In one sense, the establishment of such a center is business
consulting in its purest form. Because your private sector partner
would be in the trenches with your staff, suggestions for improvement
can be immediately tested, proven and implemented. Let the private
sector see and feel some of the burden carried by the front-line staff
of the IRS.
The goals of this type of outsourcing partnership are similar to
those you are undertaking now: rapid improvement without losing the
knowledge and commitment of current staff.
Finally, I submit that this private sector call center could also
serve as the test bed for the new technology systems that are to be
delivered under the current IRS Prime Contract for technology. It would
be important to separate this initiative from the larger technology
development effort, using it exclusively as an independent testing
center.
conclusion
Although the private sector is different from the public sector,
one basic principle remains the same: our client's core competency is
not customer service. When a large institution's core competency is not
customer service but the desire for such competency exists, such as
with the IRS, it only makes sense for that institution to seek the
assistance of a company whose only focus is customer service. In such
instances, public-private partnerships are ideal.
Customer service companies such as TeleTech have succeeded with
such arrangements for a wide range of companies. For example, TeleTech
helps Microsoft register services for software seminars. For UPS, we
track and trace parcel packages. For GTE we provide a massive customer
service effort that combines the selling and servicing of a variety of
their products under one customer service umbrella. In addition to the
IRS, we believe that similar services can be provided to other
government bureaucracies as well. Solutions are inherent in
partnership.
TeleTech is proud of its partnership with the Postal Service and is
excited about innovation at the IRS. We hope our fully customer-centric
approach, technology and people-based solutions can be of help to this
committee as you explore change at the IRS. Together, we believe there
is real re-invention potential.
Possible Pilot Program
Senator Campbell. Ms. Martinez, I might tell you that I am
going to ask staff to look into the possibility of doing a
pilot program that you suggest that would be administered by
the IRS. Last year--as you might know, this committee deals
with the budgets of a number of agencies, and one of them
happens to be the Bureau of Alcohol, Tobacco and Firearms
[ATF], and the drug czar's budget, too. And last year we put
quite a bit of money into a national program to try to educate
youngsters about the dangers of drugs that seems to be going
very well. We also, obviously, try to do this with a revenue-
neutral budget so that we don't have to raise taxes to do it,
and sometimes that is difficult because we have to try to find
other money in the discretionary part of our whole budget. But
I think it is worth exploring.
I just want you to know that we are going to at least look
into the possibility of doing that.
Ms. Martinez. I appreciate that. Thank you.
Senator Campbell. Ken, let me ask you just a couple of
questions. Basically, what you are suggesting is that the IRS
enter into a public-private partnership, as the Postal Service
has. Is that right?
Mr. Tuchman. That is correct.
Senator Campbell. I would guess that, considering we are
really dealing with a problem now of up-to-date IRS technology,
we do not have that in the private industry because they would
go broke if they don't keep up to date. They can't compete. And
if they can't compete, they lose market share and all the rest
of it happens, unlike the Federal Government that doesn't have
to compete. So it might be a good idea.
Has it been mutually beneficial for both the Postal Service
and for you as a company?
Mr. Tuchman. It has been extremely beneficial.
Senator Campbell. We haven't heard anything from the Postal
Service one way or the other, frankly.
Mr. Tuchman. From the Postal Service's perspective, they
have dramatically increased service that was not previously
available. People were forced to wait in line 25, 30 minutes to
have simple questions answered. Now, simply through the
telephone or through the Internet, they are getting their
answers, which are being responded to within seconds. And the
program is now being rolled out all across the Nation.
Senator Campbell. Well, I notice in your written testimony,
you have 18 customer communication around--everywhere, the
United States, United Kingdom. It lists a number of computer
workstations and so on.
What areas in the United States are your company?
Mr. Tuchman. Today, TeleTech has 13 facilities in the
United States, and then 5----
Senator Campbell. In 13 cities you have these things set
up?
Mr. Tuchman. Right. We are in locations like South
Carolina, West Virginia, New York, Pennsylvania. We are right
here in Colorado--we are one of the larger employers in
Colorado--California, et cetera. We are also in five countries
outside the United States.
Senator Campbell. Have you made any proposals to the IRS or
any other agency besides the Postal Service?
Mr. Tuchman. No; we have not. We have had some preliminary
meetings with the IRS just to let them know that our services,
in fact, exist.
Senator Campbell. As I understand it, the IRS--I might be
corrected on this, but as I understand it, they have, you know,
waves. They are very busy in the spring and less busy in the
fall.
Mr. Tuchman. Correct.
Senator Campbell. Do you think private industry can deal
with that easier?
Mr. Tuchman. Well, I think when you look at--if you just
take the United Parcel Service or the Postal Service as an
example, they have identical waves.
Senator Campbell. That is right. Christmas and----
Mr. Tuchman. Christmastime and tax season are their two
busiest times.
I think it is also important to note that these
organizations that have chosen this public-private--that have
chosen to do outsourcing, in many cases the savings are in the
hundreds of millions on an annualized basis.
The other thing is that we are finding that the employee
turnover is dramatically reduced because the employees are less
frustrated because they actually have proper systems to do
their job and do their job properly.
So what we are proposing here is really a test bed, a
laboratory that the IRS would be able to actually sample a
relationship between public and private sectors.
Senator Campbell. I suppose there are some problems when
you talk about replacing some of the people in the Federal work
force. You can't just fire them. Unfortunately, sometimes you
can't. You have to move them around and find other places for
them under Federal law.
Mr. Tuchman. Well, our goal actually would not be to
replace the existing workers. We believe that they actually
have a lot of value that they can provide. Our goal would
actually be a partner in managing and providing technology and
facilities, et cetera, to be able to off-load these existing
employees, and then potentially create new position
opportunities available where there is more of the repetitive-
type transactions that people are having to sometimes wait
quite a bit of time just to get answers on some of the simpler
questions that they ask.
Senator Campbell. OK. I thank you both for your testimony
and appreciate you being here.
Mr. Tuchman. Thank you.
DEPARTMENT OF THE TREASURY
Internal Revenue Service
STATEMENT BY HON. CHARLES O. ROSSOTTI, COMMISSIONER
Introduction of Witness
Senator Campbell. And now we will go to the gentleman that
I am sure many of us have been waiting to hear, the
Commissioner himself, Mr. Charles Rossotti.
Well, Commissioner, you have heard some interesting
suggestions, bordering on go jump in the lake to some very
positive ones, too. I noticed your staff person was over there
taking notes. I hope it has given you some ideas, as well as
the ideas you have gained from the other hearings you have done
around the country or you have been at around the country. And
I certainly want to thank you for being here.
Why don't you go ahead with your testimony? I would like to
ask you a few questions on behalf of some of the people who
have testified.
Commissioner Rossotti's Statement
Mr. Rossotti. I will try to be brief and just hit the high
points, Mr. Chairman, and provide time for questions. But,
first, I just want to thank you for inviting me to be here and
allowing me to participate and listen to the problems that many
of your constituents here in Colorado obviously have. As you
know, I have only been Commissioner for a relatively few
months, and one of the reasons I took the job, having come from
the private sector myself, is that I certainly was aware from
personal experience, as well as the experience of many
colleagues and friends, of some of the problems that people
have in dealing with the IRS. And so I felt that since we do
need, as you observed, some form of an agency to collect taxes,
if we were going to have such an agency, we ought to do a
better job than we were doing in serving the taxpayers who are
paying the taxes. So that is the reason I took the job.
As I think you know from some of my previous testimony, the
basic thing that I said right at the beginning that I thought
we needed to do was to simply change the whole focus of the
agency. I think the agency has done a good job of operating an
enormous operation and processing an enormous amount of data,
certainly collecting 95 percent of the Government's revenues.
But it has not always done that in a way that has been
responsive to the needs of the taxpayers. And if we are going
to do that, we have to turn the whole thing around and try to
look at things through the eyes of the taxpayers. That is why I
have been traveling around for the last several months to talk
to people who are having problems as well as making suggestions
for the agency. And this is, as we certainly heard today, not
always a pleasant picture, and some of the things that we hear
certainly are very difficult problems that will not be solved
easily. But we have to listen to these kinds of problems if we
are going to effect real change at the IRS, which is actually
what I hope we will do.
Let me just make a couple of comments about some of the
things that came out in your panels, and then I would like to
just talk a little bit more broadly about some of the ways that
we are going to try over time to deal with some of these
issues.
First of all, I just want to reiterate what you said, Mr.
Chairman, that any witness who came here today or, in fact, to
any congressional committee need not fear retaliation. As long
as I am Commissioner, I will personally provide that assurance
that anybody who wants to give us this kind of input,
regardless of how critical it might be, is certainly welcome to
do it and will not suffer anything as a result of that.
Second, just with respect to the cases and some of the
issues, the specific issues that were raised today, I have
certainly listened carefully to these, and as you have noted,
we did have some IRS people here taking notes so we can follow
up. And I think there are three things that we will
specifically do. One is that the District Director, Mr. Hutton,
is here and I am going to ask him to give me a special report
on all the matters that came up today that are within this
district. I think most of them are within this district.
More particularly, though, those taxpayers that have open
cases and issues that are still unresolved, we are going to ask
a person from the Taxpayer Advocate's Office to take a special
interest in each of those cases and follow them through to the
point where they can be resolved, or at least explained as
clearly as possible to the people involved. And, third, there
were a couple of matters that were quite serious allegations,
if I heard them correctly, and we will, independently of the
district, have some investigations done of those matters to see
what we can learn, because we do want to follow up on any of
these things that may have been really improper. So we will
take those particular actions on the specific things that were
discussed today in the hearing.
I also want to make a special comment about the innocent-
spouse problem. I only began to learn about this a few months
ago, and I have to say that I think that this innocent-spouse
problem is one of the more disturbing things that I have
learned about since I have gotten here. It really is quite
unfair. There is just no doubt about that. And I wish that we
had it within our power within the IRS to provide a complete
solution to this. As I have learned, we do have the ability to
take some action to do better than we have done so far, but we
don't have full authority; and that is why in the law that is
currently being considered there are additional provisions in
there that I think will correct the problem. We will certainly
work with the committees to make that happen.
In the meantime, some of the things that we are doing on
this innocent-spouse problem are first of all, basically to
simply make sure that the authority that we do have to provide
relief to innocent spouses is actually made available to those
people who qualify. Frankly, it had not been a good process and
sometimes people who had the right to receive certain relief
were not getting it. So we are at least taking action on that
score. We have set out a new specific form that just went out
on our website. It is being printed right now on paper. So that
will be out there, and we have set up a special group in
Cincinnati to process these forms to make sure that the
particular kinds of things that have to be considered in these
cases will be taken care of.
We are also trying to do some broad training of our
employees to recognize these kinds of innocent-spouse cases,
even if the taxpayers themselves are not aware of it. So we are
doing some special training in that regard, and we hope that
very soon some of the operators on our 800 number will be aware
of this.
We are also working with some local organizations in
different parts of the country that work with spouses that may
be abused to make sure that their network is aware of some of
these procedures. So this is what we are doing, and I don't
believe that it is in any way sufficient, but it is certainly
better than what we had before. And I think with the help of
the new legislation, Mr. Chairman, that you alluded to, we can
solve this problem really once and for all.
Let me also now mention a couple of things, and I won't go
through a long laundry list because I know you want to have
time for questions and some other comments, but there are some
things that we are attempting to do in the very near term to
provide better service to taxpayers and to deal with some of
these more difficult kinds of situations that come up.
One of the most basic ones, as the gentleman who just
testified mentioned, is phone service. It is important that
people be able to get through on the phone. In many of our
cases, people are not just getting through on the phone to ask
a simple question. They are getting through because they may
have gotten a notice or a deficiency statement that they have a
question about or where they are being asked to pay money and
they have a question about that. It is certainly vital that
people be able to get through to somebody when they have that
kind of situation, as well as to just ask normal questions
about the tax law.
When I looked at the data, Mr. Chairman, 2 years ago the
situation was such that people were getting notices saying you
may owe money or they may have had a question, and the chances
of getting through on the phone to the IRS were very, very
minimal. They were really very, very low. This, of course, is
an extraordinarily frustrating and unacceptable situation.
In this filing season that we are just completing, there
was a considerable effort that was underway partially before I
got there, to at least improve it, not to the level that the
private sector delivers but certainly dramatically improve it.
And so far this season, if you look at it the way the private
sector measures it, we are answering about 75 percent of the
calls, which is still not good enough, but it is a whole lot
better than way down there where it was. That means there are
about 14 million fewer busy signals that people are getting
this season.
Second, on the more difficult kinds of cases that some of
your constituents describe today where they have gone on for a
long period of time and haven't been resolved, we have had a
number of open houses that we call problem-solving days around
the country. We are having them in various cities. The first
one here in Denver, I think, was on the 15th of November, and
then there have been ones in other cities around the country
and in Colorado as well. I think there is another coming up in
May. And these have actually been reasonably successful, I
would say quite successful, in fact, for those taxpayers who
have come in with a particular problem. They have been able to
meet face to face with a person. We have had everybody there,
and I think we have gotten about 90 percent of these cases
cleared away and have gotten very good ratings from our
customers that have come in.
That is another thing that we have started new. We have
started actually asking customers, taxpayers, what they
actually think of the service. We started it with these
problem-solving days, and we are now launching a process to
eventually ask every taxpayer who interacts with us, even in an
examination or a collection action, to actually rate the
service that they got. Eventually we will use this as part of
our way of measuring performance in the agency. This is, again,
going to take some time, but we are started on it.
On the matter of these collection situations, and
particularly when very sensitive situations arise, such as
seizing someone's home, which is probably the most sensitive
thing that you could possibly do, one of the first things that
I did when I started to hear about these things is to at least
put in place some more rigorous procedures to ensure that there
is management review of things like seizures of homes and
personal property. We have also given some additional authority
to the taxpayer advocate to deal with these kinds of
situations.
Finally, let me just mention something that has been
covered in the press. It wasn't mentioned here very much today,
but certainly an important issue is how the performance of
individual employees and managers in the IRS had been measured,
particularly those in the compliance functions. We have taken
steps to eliminate the use of certain kinds of statistics, such
as how much money was collected per person. We want to
completely eliminate that from the way that performance is
measured in the IRS. That has been done, and it is, I hope, a
thing of the past.
We are working on some new ways to measure performance that
we think will balance the interest of taxpayers as well as the
need to collect taxes. Again, this is not something that we
were able to do very quickly--eliminate the unfortunate kinds
of statistics. Putting in place the right kind of measures that
really measure what we need will take a little longer.
Now, those are just some near-term things, and we will
continue to work on those. Let me just finish up by saying that
even if we do all those things and we do more of them, I don't
think we are still going to produce the IRS that the public
expects and deserves. I think if we were to define what it is
that the public expects, as I would understand it, we have to
meet two standards:
One is that for each and every taxpayer that we interact
with in any way, shape, or form, whether it is the simplest
thing like providing a form or something as difficult as
collecting money when there's a real problem, every single one
of those cases should be measured and should be done in such a
way that it provides the taxpayer the most helpful possible
service that they can get from us during each one of those
interactions.
The second thing I think we need to accomplish is an
overall fairness in the way compliance is done so that anybody
who is willingly complying, which, of course, as many of your
panelists mentioned, is the majority of people, each of those
people will not feel that somehow there is someone else over
there who is a neighbor or a business competitor who is not
complying and putting an unfair burden on them. So we have to
look at this whole thing as a fair form of compliance.
Those are really the standards that I think we need to
measure ourselves against, and we need to go a long way and
make a lot of changes to reach them at the level that we hope.
But as you know, in some of my testimony before your committee
earlier, Mr. Chairman, just to briefly summarize, I think in
the long run there are five big things that we have to do.
One is we have to turn the whole thing around to be much
more focused on preventing problems early in the cycle, solving
problems with taxpayers early rather than later on getting into
as many enforcement actions as we do. And I think the
suggestion about more taxpayer education is certainly a good
one in that regard.
The second thing is that we need to really organize the IRS
in a way that it is focused externally more on helping
taxpayers, and there is a large number of diverse taxpayers in
this country, from college students who just have a very simple
form to file through a phone call, to more complex businesses.
I have proposed reorganizing the entire IRS to be focused on
different operating units where each would be responsible for
each one of these groups. The small business people, for
example, would have a group that would just work to help them
and work with them throughout the whole cycle of complying with
the tax law.
I think the third one, which is very much related to that,
is that we do need to streamline internally the way that
management roles are defined so that we have a clearer set of
responsibility and accountability. Right now the IRS is quite
fragmented, as some of your panelists have noted, and that is
because it has really evolved over 45 years in a certain way,
and I think it is time to rethink that.
I think the fourth one I have mentioned. We need to measure
the performance of our employees the right way so that it
encourages the right kind of behavior.
And, finally, of course, the big one is we do have to
replace the really old technology that we have, and you know,
Mr. Chairman, we have come before your committee to ask your
help in that. It is a big job, but we will never reach the goal
of having the right kind of service or the right kind of
fairness with taxpayers with the 30-year-old computer systems
that we have in the IRS.
So those are some of the things that I think we need to do
long term, and they are not going to be easy to do and they are
not going to be quick to do, but I think with your help and the
help of others in Congress and, in particular, the bills that
are currently going through, I do think we can make progress in
this direction.
Thank you for giving me the opportunity to testify, Mr.
Chairman.
Prepared Statement
Senator Campbell. Thank you. And I also thank you for
assuring the people that were here on the panel that there
would be nothing in the way of retaliation in any way, shape,
or form from the IRS and giving that same kind of commitment.
We have your prepared statement and it will be made part of the
record.
[The statement follows:]
Prepared Statement of Charles O. Rossotti
Mr. Chairman, I want to thank you for the opportunity to appear at
this field hearing. I am also very pleased that so many of our
customers--the taxpayers in the Denver region--will be expressing their
views too, as well as NTEU President Robert Tobias.
As you know, I became IRS Commissioner in November, and one of the
first things I set out to accomplish was to change the focus of the
IRS. If we are to provide top-quality service to our customers, we must
see the agency through the eyes of taxpayers. Sometimes, it may be
different, but if we are to effect real change at the IRS--as I am
attempting to do--it is a critical first step. So once again, thank you
for allowing me to testify today and for the chance to hear what's on
our customers' minds.
This morning, I would like to discuss what I am trying to do in
both the short-and the long-term to modernize the IRS and provide
first-quality service to our customers. But before I begin that
discussion, I want to speak to the innocent spouse issues that have
been raised today.
We are trying to do all we can to help innocent spouses. This is a
very troubling situation, and I wish I could provide a complete and
immediate solution. The law limits what I and our employees can do in
this area, but we are doing much more to solve this problem.
The Treasury Department announced on February 9 a set of
administrative changes to expand innocent spouse relief. We are already
beginning to implement these actions. Less than two weeks ago, we put
up on our website a new application for an individual seeking innocent
spouse relief. New Form 8857 can be found at www.irs.ustreas.gov. We
have also expedited printing of the paper version of the form, and it
should be available to taxpayers in a matter of days. These forms
requesting innocent spouse relief will be sent to Cincinnati, Ohio and
processed at that central location by examiners with expertise in
innocent spouse cases.
We are also training our employees to better recognize a potential
innocent spouse situation, even if the taxpayer is unaware of the
potential relief. Special training courses will be developed for our
collection and examination personnel. And telephone operators with
special training in innocent spouse provisions will be available on our
toll-free number: 1-800-TAX-1040.
In addition, we want to reach out to national and local
organizations, like those here in Denver, that help abused and battered
spouses. They are excellent partners in helping to get out the word
about innocent spouse relief. They are also in an excellent position to
alert individuals who might qualify for relief to consider the innocent
spouse provisions.
I recognize that these measures go only so far, and are far short
of what I would like to see. With the help of the new legislation now
going through Congress, we will be able to do much more.
One of the IRS' most important responsibilities is to manage a
successful filing season, and we are doing so again this year, both
nationwide and in Colorado. This season, while total return receipts
are about even, our e-file and TeleFile alternative means of filing are
up 25 and 26 percent respectively over the same time period last year.
Colorado closely tracks these national usage figures. E-file is up 23
percent and TeleFile is up 29 percent in the State; paper returns are
down five percent. Colorado's refunds are up six percent and the
average refund is $1,369, up from $1,274 last year.
As of April 3, 1998, over five million individuals have filed by
phone. This spring, small businesses nationwide were also able to file
Form 941, Employer's Quarterly Federal Tax Return, over the telephone.
This year, we expect over 1.2 million returns to be filed using this
option.
Beginning in January 1998, the IRS also expanded telephone service
to 16 hours-a-day (7:00 am to 11:00 pm), Monday through Saturday. And
starting today, we will be on the phones 24-hours-a-day until midnight
the 15th. Next year, during the busiest time of the tax season, there
will be phone service 24-hours-a-day, seven days-a-week. And for those
procrastinators who have not even started the process, we will have IRS
personnel at the main Post Office tomorrow to help prepare returns.
Next year, I would hope they would consider the ease of e-file and
TeleFile.
So far this filing season, we have answered nearly 30 million phone
calls; including more than 700 thousand in the Rocky Mountain District.
Our nationwide overall phone access, as defined by GAO, to telephone
assistance has increased from 30 percent in fiscal year 1996 to about
91 percent this season. The Rocky Mountain District, which includes
Colorado, also came in at 91 percent. Nationwide that means there have
been 14.4 million fewer busy signals experienced by taxpayers.
The IRS also expanded walk-in service hours. During the last six
Saturdays of the filing season, over 150 selected IRS walk-in offices
were open from 9:00 am to 3:00 pm. On Saturday, March 28 we held EITC
Awareness Day across the country, and the last two Saturdays of the
filing season were Problem Prevention Days. In the Rocky Mountain
District, Problem Prevention Days were held in Denver, Colorado
Springs, Cheyenne, Casper, Boise, Billings, Missoula and Salt Lake
City.
We also had a number of Problem Solving Days in the Rocky Mountain
District that met with great success. On November 15th, we conducted a
Problem Solving Day in Denver. Of the 370 total cases presented by
taxpayers, 352 have been closed. That's a 95 percent closure rate and
we are still working to finish the remaining 18. Our customers were
also extremely satisfied with the service they received. In an on-site
survey of customers receiving service, we received an average 6.8
rating out of a possible seven. The next Problem Solving Day will be
held on May 16 in Denver.
A growing number of taxpayers are also getting the tax information
they need from our Internet site, IRS CD-ROM's and our fax system. So
far this fiscal year, our Internet site had over 300 million hits. That
is about triple over the same period last year. Our fax system traffic
is about 70 percent higher than last year. Over 625,000 successful
transmissions of tax forms and information have been made by fax.
The IRS, in conjunction with its private sector partners, has also
made significant progress toward enhancing electronic payment methods.
I was very pleased that our Electronic Federal Tax Payment System made
such substantial progress with existing business users that it will not
be necessary to impose a penalty on July 1, 1998, as was previously
planned. The penalty waiver from July 1, 1998 through December 31,
1998, will extend to those employers first required to use EFTPS on or
after July 1, 1997, and that make timely deposits by paper coupons. We
think that's good news to many of your small business constituents.
In fiscal year 1997, more than $655 billion in tax payments was
deposited electronically through EFTP, a significant increase over the
$416 billion deposited in fiscal year 1996. As of April 4, 1998,
deposits in fiscal year 1998 are already over $620 billion. Enrollment
continues to grow with over 1.8 million taxpayers currently enrolled in
the system, of which over 500,000 are volunteers who are not required
to use the system. This success is the reason that we have been able to
defer the penalty.
For the coming fiscal year, we will pursue a highly-focused
initiative to improve taxpayer service through improved clarity of
notices, forms and publications, better telephone service, more walk-in
service, expanded electronic filing, improved training of customer
service representatives, strengthened support for small businesses,
increased staffing for the Taxpayer Advocate's office, and the creation
of Citizen Advocacy Panels.
As the Chairman is aware, I have also proposed a sweeping
modernization of the Internal Revenue Service. Despite the short-term
progress we are making, we will only reach our goal of first-quality
service to each and every taxpayer through changes in five key areas,
each complementing the other.
First, we must implement revamped IRS business practices that will
focus on understanding, solving and preventing taxpayer problems.
Instead of the historic one-size-fits all agency, we should tailor
efforts to taxpayer groups with common needs. College students and
retired seniors are but two examples.
Second, we need an organizational structure that serves a segment
of taxpayers with similar needs. One potential way to organize the IRS
is to divide it into four units, each charged with top-to-bottom
responsibility for serving a segment of customers, such as small
businesses.
Third, the IRS needs fewer layers of management and the creation of
management roles with clear responsibility and accountability.
Fourth, we must measure organizational performance by balancing
customer satisfaction, business results, employee satisfaction and
productivity. It is important to create a system that positively
influences employee behavior.
Fifth, we must take advantage of new technology. IRS' current
computer systems cannot support the agency's mission and goals. We
desperately need to upgrade our 1960's technology. But building new
computer systems to support old business practices and a complex
organizational structure will not work. The recently-issued technology
modernization blueprint and the new Chief Information Officer
organization provide an excellent basis for managing our new
technology.
The consulting firm of Booz, Allen & Hamilton will validate the
concept for modernization in terms of risk, cost and impact on
customers, both external and internal.
In conclusion, I believe we can transform the IRS into an agency
dedicated to customer service and working for the taxpayer. We can make
it an organization that helps taxpayers meet the obligations imposed by
the tax laws while ensuring that compliance is fair. We can do all of
this while increasing productivity and shrinking the size of the IRS in
relation to the economy. This will take time and investments to
modernize technology, business practices and organization. But, with
the support of the Congress, I am optimistic that we will succeed.
Public Service Announcements
Senator Campbell. Let me ask you a few questions. I was
really interested in Ms. Martinez's idea about public service
announcements, if we could find the money. I think our
authority is about $25 billion, and about one-half of that is
discretionary. And under, you know, the theory that we are
going to have revenue-neutral expenses, we have to find some
money somewhere else. But does the IRS do anything along that
line now of public service announcements? Not to extol the
virtues of the IRS, but to try to tell people the solutions or
how they----
Mr. Rossotti. It is very limited, very limited. I think we
did a limited amount of that with respect to encouraging people
to use electronic filing, which is something that solves
everybody's problem because you get more accurate stuff in and
that was successful. But I don't think that we have done as
much as we could with the whole opportunity to focus earlier in
the cycle to educate people. I actually agree with I think it
was Ms. Martinez who said that ultimately moving everything up
and getting the problems prevented in the first place is the
right way to do it. But, no, I don't think we have done much
with public service announcements.
Senator Campbell. But if we could do something along that
line, you would support that?
Mr. Rossotti. I would support anything that we can do to
educate people about how to get their returns filed right in
the first place, absolutely.
IRS Outreach Efforts
Senator Campbell. I also want to apologize that we couldn't
get some of the written testimony to you before. The fact is we
didn't have some of it until the last minute. But I appreciate
you trying to kind of ad-lib some of the answers and deal with
them as well as you can.
The IRS has been conducting problem resolution days which
provide taxpayers an opportunity to meet the IRS. We have heard
of that. You have spoken of that a little bit. But what steps
is the IRS taking to reach the people that may not or cannot
make it to the problem resolution sites?
Mr. Rossotti. Well, actually, of course, what we really
want--it is almost a slogan--is that every day be a problem-
solving day. I think that the improved phone service and the
increased walk-in service during filing season are the two most
specific things that give you an answer. We have increased the
phone service to 16 hours a day, 6 days a week, and the
accessibility is up, and the last 2 days of the season, we are
actually open 24 hours. Plus the last 6 Saturdays of the filing
season, we have had open houses or problem-solving days where
people could come in on Saturday mornings, for example, in
shopping malls and other places and get service.
So we are trying to reach out where people need the service
and give it to them. I think there has been a lot of progress
this season, although I would certainly not claim we are
anywhere close to where we should be, ultimately.
Senator Campbell. You heard both Ms. Powers and Ms.
Morehead. They are classic examples that are faced by the
innocent spouse. It is just unbelievable to me that a woman
could lose her home because of something her husband did not do
or did do. What protections are there currently available?
Innocent Spouses
Mr. Rossotti. Mr. Chairman, I have to say that when I first
learned about this problem, I looked into it and I was rather
shocked myself, not having come from the tax law business, to
find out that there are really only very, very limited
protections. I will say the IRS has not done as good a job even
of extending those to people, which is what we are trying to
fix. But basically it is only in the case of where there is an
assessment that has been made after the return is filed and
where it can be shown that the innocent spouse did not really
have responsibility for that and there are some other
restrictions on it. So it is really quite limited in terms of
what the law permits today.
In other words, when the tax return goes in, under the
current law, and both spouses sign it, they have that joint and
several liability, and that is in the law. And I think we all
understand that in some cases that is not right, and that is
why we need to change that.
Senator Campbell. Well, under Senator Roth's bill in the
Senate Finance Committee, he is trying to fix that, as you
probably know.
Mr. Rossotti. I am confident that it will be fixed. There
are various nuances of different provisions as to how it would
be fixed, but it will certainly give substantially more
protection to innocent spouses.
Senator Campbell. It will give spouses relief and allow
them to only pay their own taxes. The problem is they are not
retroactive. So that means those people who are already caught
in this bind, we need to try and work with the people that have
already been caught in this spousal problem.
Mr. Rossotti. Yes; we will. As I told you in the testimony,
we are doing a lot more to at least reach out and use the
authority that we do have. And there are other things that are
tangentially related. I think one of the taxpayers mentioned
offers in compromise. We do have authority under offers in
compromise. We are trying to look at ways of making that more
available or at least more--not so much more available, but to
have the timeframe that it takes to do these things be shorter
and make it a more practical option for more taxpayers.
Senator Campbell. Well, that section of Senator Roth's bill
actually is a good section. I think it is going to be very
popular and widely supported. But it won't come online until
the 1999 filing deadline, I guess. So I would just hope that
you would try to implement that as fast as you can, should it
become law, which I assume it will be.
Mr. Rossotti. Yes, sir.
IRS Penalties
Senator Campbell. One of the biggest frustrations certainly
that taxpayers pay are the penalties. We have heard about that.
The penalties go up. Even if they pay off what they owe, the
penalties are so much more sometimes they can't even catch up
with it. And the documentation to show that they are doing what
the IRS has told them to do is sometimes very conflicting.
Could you maybe elaborate on that a little bit about the
penalties, how you are going to address that?
Mr. Rossotti. Well, again, interestingly enough, Mr.
Chairman, one of the things I did before my confirmation
hearings was consult with several of the former Commissioners,
because they have interesting things to tell you. And to a
person, every one of them said that the place you ought to
really work on is those penalties; those are not right.
Unfortunately, they have also been studying them for years
and have not completely solved the problem because it gets to
be complicated. But I think that in the bill, again, that will
be before the Senate soon, there are some particular things
that I think are going to ameliorate that. One in particular
has to do with the failure-to-pay penalty, which occurs when
someone has an installment agreement. It would reduce the
amount of penalties that would be related to that situation,
which is one of the most common ones that causes this buildup
of problems that occurs. And right now that is a penalty in a
statute, so it is not really up to the IRS to handle that in
most cases.
But I think with the new bill, it would deal with that one
particular case that is probably for individual taxpayers one
of the most onerous and probably the most unfair.
Senator Campbell. One of the most famous cases was that of
former boxing champion Joe Louis in the 1950's. He got so far
behind in his tax--perhaps you remember that--that he couldn't
begin to even pay the penalties, and finally, in fact, Congress
passed a special relief bill because he was just getting
further and further in debt. But it is unlikely that Congress
would pass a relief bill for every single person where the
penalties have kind of overburdened them. So we need to do that
somewhere in the agency; we need to help that.
Also, according to the information provided by Ms. Powers,
she received notification of a tax obligation 5 years after she
filed that showed a $13,000 tax balance owed, and in that 5
years it became $35,000. She didn't even know the original
amount was owed. How could something like that happen?
Mr. Rossotti. Mr. Chairman, I just don't know. I really
don't----
Senator Campbell. I know you weren't there, and I am
certainly not blaming you for it, because----
Mr. Rossotti. I know. There are these situations. I really
don't know. I mean, we will look into that situation.
Senator Campbell. Well, I would hope you would take some
steps that people are notified before the interest starts
accumulating, because that is just almost unimaginable how it
could be 5 years later and get this terrific bill that they had
no idea was coming.
Mr. Rossotti. As a matter of fact, in general, that is one
of the biggest systematic problems, not necessarily 5 years,
but as a general rule, one of the things I have learned that is
a very systematic problem at the IRS--and this has much to do
with the computer systems as well as other things--is that we
are much too slow, much too late, in getting to things such
as----
Senator Campbell. Well, one of the sections of Senator
Roth's bill, in fact, requires the IRS to notify within 1 year,
and I would think that you would support that. But I obviously
know, too, that part of this, when you are dealing with 200
million taxpayers, you have got to have the kind of technology
that allows you to get ahead of the curve.
Mr. Rossotti. Eventually, we should be much faster in all
these things, but in this area, I think the technology is a
major constraint, unfortunately, right now.
Senator Campbell. Ms. Sanders, as I understand it, lost her
home in this tug of war with the IRS. From her testimony, it
appears that the IRS took steps to seize her home even though
her ex-husband's wages had been levied to pay the capital gains
tax. If his wages had already been levied to pay the tax, what
would the need be to seize her home?
Mr. Rossotti. Mr. Chairman, I don't--I can't----
Senator Campbell. I don't mean to put you on the spot.
Mr. Rossotti. We are going to look into it. As I told you,
we are going to look into all those cases and try to find out
more about what happened.
Changing of Seizure Numbers
Senator Campbell. Well, then, let me ask you because I know
you have only been on board one-half of a year or so, and I
know these may be a little bit unfair to ask you. But you might
know this: Does the IRS change everybody's seizure number every
October?
Mr. Rossotti. Mr. Chairman, I don't know, but we will find
out.
Senator Campbell. OK. You are not sure. Could you find that
out and submit it to the committee for the record, too?
Mr. Rossotti. Yes.
Senator Campbell. It might be something we want to offer as
an amendment to Senator Roth's bill.
Mr. Rossotti. Yes; we will find that out.
[The information follows:]
The serial numbers initially assigned to a seizure do not
change with each new fiscal year.
Senator Campbell. What is the policy with regard to
changing seizure numbers? Is there any kind of a policy at all
in place?
Mr. Rossotti. I honestly don't know, Mr. Chairman. We will
find that out and get back to you.
[The information follows:]
After a seizure is made, the revenue officer obtains a
serial number and annotates that number onto the seizure
documents. The serial number is assigned by an automated system
for the purpose of establishing an accounting control of seized
property, tracking the age of the seizure, totaling expenses of
the seizure, identifying the disposition of the assets, and
closing out the seizure file. Seizure serial numbers initially
assigned to the case file continue to be the same number until
there is a final disposition of that seizure.
Credit Card Payments
Senator Campbell. Does the IRS make payments by credit
card? I heard that, too.
Mr. Rossotti. That is another one that I don't know. I
mean, I suppose it is possible because I think there are some
minor purchases that can be made by credit card, but I don't
know. We will find that out for you.
[The information follows:]
The IRS purchases goods and services with the government
credit card. The credit card is used by the IRS as a
streamlined purchasing method for making micro-purchases
($2,500 or less) and for ordering from existing government
contracts, such as those on General Services Administration
(GSA) schedules and indefinite delivery/indefinite quantity
contracts negotiated and administered by the IRS. In these
cases, the credit card serves as the vehicle for both procuring
and paying for the goods or services. We anticipate that, in
the future, the government credit card will be used by the IRS
to make payments for deliveries, even in cases where a standard
contract document is the required purchasing method.
Use of Private Contractors
Senator Campbell. We heard from Mr. Tuchman and also Ms.
Martinez that they suggested basically that we use some outside
contractors to do some of the work of the IRS. What would you
think of that idea? Coming from the private industry yourself,
I am sure you know, as I do, that they are much more efficient
than Government agencies.
Mr. Rossotti. There are certainly some things. Most
important is the new technology, which, of course, we are
planning to do almost entirely with prime contractors. I think
as you get into things like specific taxpayers' tax accounts,
it gets to be a little bit more difficult to manage.
Senator Campbell. Dealing with Ms. Martinez's comments,
too, have you ever heard of a hit list that she suggested or
alluded to?
Mr. Rossotti. I have not.
Senator Campbell. But I am sure, being a Federal agency,
there is zero tolerance for any racial discrimination, I would
guess.
Mr. Rossotti. Yes, sir; there certainly is, in both the
official policies and, I have to tell you, from my own personal
commitment. I have a very, very strong personal belief in the
need to be inclusive and to be nondiscriminatory and to take
advantage of everybody's talents in the appropriate way. And I
certainly would not tolerate in any way that I would have any
influence, any form of discrimination either internally or with
taxpayers.
Automation at IRS
Senator Campbell. Ms. Martinez also believed that a
majority of tax auditor and revenue agent positions could be
eliminated because, in her words, most audits could be
conducted by correspondence using computer technology. And I
know we are moving into the time when computers talk to
computers an awful lot, but----
Mr. Rossotti. Well, actually, a rather large fraction of
the audits on individual taxpayers are already done through
service centers and correspondence and so forth, and the
percentage of audits being done by face-to-face auditors in the
office is actually declining and is relatively small compared
to what it used to be. But I think that there are always going
to be some cases where there is just a need to bring
documentation in and sit down face to face.
Senator Campbell. In fact, that does fly in the face a
little bit of some of the comments we have got, that, my gosh,
they make a telephone call, and they get a recording.
Mr. Rossotti. Right.
Senator Campbell. They don't want a machine, talking to a
machine. They want to talk to a live human being, as you can
understand.
Mr. Rossotti. I think that that is exactly what I was going
to say, that what we really need to do, really what the private
sector does, is to provide the appropriate form of service to
each customer based on what their particular needs are. So some
people just as a matter of personal preference like to deal in
person, and others--you know, I always like to talk about when
my kids were in college. I don't think they knew what a stamp
is. They just used the phone. And so you have to accommodate
different needs of different kinds of people.
Educating Children on Tax Issues
Senator Campbell. I might comment for your reading, if you
haven't already, this recent Washington Post article, ``A Tax-
Time Bonus for Your Children.'' It was a little bit along the
lines of what Ms. Martinez said. It talked about how to educate
youngsters in dealing with tax problems, and if you haven't
read that, it might be interesting reading for you.
Mr. Rossotti. Thank you.
[The information follows:]
A Tax-Time Bonus for Your Children
(By Suzanne Sutton, Special to the Washington Post, April 10, 1998)
``Mom, I think it's better if I itemize,'' 10-year-old Jason says
as he looks up from his stack of tax forms.
``Go for it,'' says his mother, without looking up from hers.
``But don't forget, you can only take medical expenses over 7.5
percent of your adjusted gross,'' his 12-year-old sister, Kim, calls
from the kitchen. ``Unless you have a high mortgage deduction, it won't
make sense. By the way, can I use one of your Schedule E's? I forgot
about the roof repair on one of my apartment houses.''
Some strange sort of upscale family bonding? Or gruesome child
labor? A CPA head-start program? None of the above. It's April!
Think about it. The hard part about tax-time isn't the tax forms
themselves. It's that the tax forms count, the numbers have to be true,
our records precise, and at the end, we have to part with our money.
Remove all that and what do you have? A devil of a good math problem
for kids, tailor-made for almost any age. And free at any post office
or public library.
True, there are lots of big words, and lots of fine print, much of
which we don't even understand. True, the rules are rigorous, the
penalties ominous, and the tax code oppressively complex, but no
matter. We're not filing these forms.
When you get down to it, tax forms use math no more complicated
than simple arithmetic: lots of addition, a bit of subtraction (never
quite enough), and occasionally a little multiplication or division to
offer some spice. If you choose your forms well, you might even get a
chance to do some percent problems, but that's pretty much it. So you
see, even your little ones can have a go at this.
And they will want to. Children want to be grown up and there is
nothing juvenile about the 1040 or this year's Schedule D. Bring home
their very own tax forms, and you're likely to be greeted with a big
smile and a ``for me?!''
After you get the forms home your next step is to set the framework
to get him started. This is a project that can suit a wide range of
ages and abilities, so try to remove any anxiety that you, as a wise
and reflective adult, associate with the forms. No one will care if
your child's advertising expenses exceed his gross profits, if he takes
depletion allowance when you don't even know what it is, or if he
chooses to take the ``audit-risky'' home office deduction. Adjust
suggestions to suit those of your child. The steps are simple.
Explain the basics.--What may seem obvious to us, does not seem
obvious to them. Explain to your child the idea of income tax, that
it's a way for the country to get the funds it needs for all it does,
that the forms are filled out by anyone who earns income and are used
to figure out how much each person must pay.
Give him a persona.--Why be a struggling student, when can be a
wealthy landlord? Why be a government executive, when he can be a
staging artist? Three ex-wives could be interesting, with all that
alimony, and farming might be fun. Get extra forms.
Or, adopt a persona.--Calculate the tax forms for someone famous.
Imagine a rock star's Schedule C: Travel, Meals and Entertainment. How
about Ebenezer Scrooge's Itemized Deductions? Michael Jordan's 1040,
line 7. A Congressman from your home state?
Guide him through the forms he'll use.--To the uninitiated, the
forms look like a bunch of rows and columns and fine print. (Of course
they also look that way to the initiated.) You may want to highlight
the lines that make sense to use. Or not. It's perfectly okay to have
nonsensical entries. For young children, just filling in columns,
adding, and subtracting will be enough. Older children may enjoy coming
up with complex scenarios.
Let him follow some steps.--Believe it or not, the tax forms really
do tell us what to do. They tell us which columns to add, what to
subtract, and what percentages to take. They refer us to other lines on
other forms and then back again. This may be tedious when me do it, but
it is excellent practice for kids, not to mention potentially quite
fun--much like a maze.
Calculators?--As someone who works every day with high school
students who are unable to do arithmetic without one, I encourage kids
to try it without, until I'm sure their skips are solid. For young
students, or students struggling to learn the basics, this can be a
great ``by hand'' exercise. But calculators can be useful for complex
situations, ``what if?'' questions, and certainly for speed. You can do
it both ways. This is fun, remember?
Show the connections.--All roads lead back to the 1040. Help them
see how all the supporting forms lead back here, and how to compute the
final tally using the table in the IRS booklet.
Don't forget to sign.--You'd be surprised how exciting that can be
for kids, to sign their own tax form. They even can write a fictitious
check if tax is owed. They'll derive far more pleasure from the act
than we do, to be sure.
Ignore the deadline!--If you're too frantic filing your own forms
before the 15th, don't worry. Save your extra forms or collect some of
the surplus and give them to your children after April 15. No penalties
here.
Burden of Proof
Senator Campbell. You know, most people, I think most
constituents--and me, too, to a certain degree--believe that
the IRS assumes you are guilty right from the get-go and it is
up to you to prove you are not. In other words, the burden of
proof is on the taxpayer, which, you know, in most other areas
of our society you are innocent until proven guilty. And we
hear this all the time, and this is the law, this is our basic
fundamental right as Americans, we are innocent until proven
guilty. But with the IRS, you are guilty until proven innocent.
I understand that because, believe me, as an elected
official here, guilty until proven innocent, too, of darn near
everything, so I understand the process.
But would you comment on that? I know you have been trying
to make some fundamental change in that attitude.
Mr. Rossotti. Yes; well, I think when people say that, my
interpretation is there are sort of two levels of meaning
there. One level is sort of in the technical legal sense of,
you know, what is the burden of proof and so forth, and there
are some changes that will be in the bill coming up that will
adjust that for taxpayers that go to court. And I think
certainly my view is that it is appropriate that, if everything
is equal, the taxpayer ought to get the benefit of the doubt.
But I think actually, in my discussions, that many
taxpayers, not so much the tax lawyers but the broader group of
taxpayers, sort of look at it in--they are not so much focusing
on the technical legal interpretation of what happens when you
go to tax court and how did the judge make a decision. I think
they are really looking at it more as an attitude and what is
the point of view of the IRS. I mean, is the IRS basically
taking the point of view that you are wrong until you can prove
me right as opposed to the technical side. And I think on that,
you know, that is a broader kind of--that is really the shift I
said. That is really the shift that we need to make, a basic
shift. We need to look at ourselves more as problem solvers
with taxpayers and take the point of view, OK, this taxpayer
has a problem; even if they do owe more tax, let's try to
figure out through offers in compromise or installment
agreements or some way to get this taxpayer current, in
compliance, and then move on from there so that they can get on
with their life and we can get on to the next thing.
I think that is a different point of view perhaps than--not
perhaps, it is a different point of view than has been the
focus in the past.
You know, I really want to say that I don't think that we
can really criticize the IRS employees for that at all, because
I think that really my perception is that everybody that was
involved--and probably this would have to include the Congress
as well as the various administrations on both sides--took the
point of view that, you know, as long as the money was flowing
in and things were running right, you know, that was the most
important thing. And I have certainly heard it from many people
that are former IRS employees and former executives who are not
even there anymore, who said, look, the way that you would get
in trouble in the IRS--and it was from the management at the
top--is if you, quote, gave away the Government's money and
didn't collect every cent in every circumstance. You know, that
was the way you would get in trouble. You would never get any
benefit for trying to really solve a problem for a taxpayer,
particularly.
That is really an obsolete point of view, and I think it
needs to be changed, and I think it is going to certainly
require the continued support of the Congress to make that
happen.
Senator Campbell. Well, the public momentum is there now.
Mr. Rossotti. Yes.
Senator Campbell. I have cosponsored I think every Taxpayer
Bill of Rights since I have been there 10 years, including the
first one 10 years ago that put restrictions on IRS employees
getting bonuses for money collected. It put the burden of proof
on the IRS so they would have to prove you wrong rather than
you prove yourself innocent. I still remember that bill 10
years ago. It would have required the IRS to pay interest if it
was their mistake, just like the individual has to pay interest
if it is their mistake. We never could get that passed, but
just at that time the support for it in the administration, the
support for it among some of our colleagues, and the support
for it by the public just did not have the momentum it does
now, and I think that the hearings they have done on the House
side recently, hearings that you are aware of, and the support
from this administration to make some changes, and certainly
the momentum has developed at the grassroots level is going to
put some of those things in place, or at least peripherally,
that we have been talking about for years.
Mr. Rossotti. Yes, sir.
Senator Campbell. Let's see. I think that perhaps--I had a
number of other questions, but in the interest of time, I think
I will go ahead and ask you to submit the answers to those in
writing, if you would.
Mr. Rossotti. Sure.
Submitted Questions
Senator Campbell. I certainly appreciate you being here. I
know you have a busy schedule. You are going to a lot of
places, but thank you very much. I have about five or six more
questions that I think are important for this committee to
know, and that will give you more lead time than you had today,
by the way. I would hope that you would stay here at least for
our last panelist, who is Mr. Robert Tobias, with the National
Treasury Employees Union, if you have the time.
Mr. Rossotti. I will.
Senator Campbell. And thank you again for being here, Mr.
Commissioner.
[The following questions were not asked at the hearing, but
were submitted to the agency for response subsequent to the
hearing:]
Questions Submitted by Senator Campbell
denver, colorado field hearing
Question. There appears to be some conflicting information about
seizure numbers. Does the IRS change seizure numbers each October at
the beginning of a new fiscal year?
Answer. No, the serial numbers initially assigned to a seizure do
not change with each new fiscal year.
Question. Exactly what is the IRS policy with regard to changing
seizure numbers during such proceedings?
Answer. After a seizure is made, the revenue officer obtains a
serial number and annotates that number onto the seizure documents. The
serial number is assigned by an automated system for the purpose of
establishing an accounting control of seized property, tracking the age
of the seizure, totaling expenses of the seizure, identifying the
disposition of the assets, and closing out the seizure file. Seizure
serial numbers initially assigned to the case file continue to be the
same number until there is a final disposition of that seizure.
Question. Just a curiosity question--Does the IRS make payments by
credit card?
Answer. The IRS purchases goods and services with the government
credit card. The credit card is used by the IRS as a streamlined
purchasing method for making micro-purchases ($2,500 or less) and for
ordering from existing government contracts, such as those on General
Services Administration (GSA) schedules and indefinite delivery/
indefinite quantity contracts negotiated and administered by the IRS.
In these cases, the credit card serves as the vehicle for both
procuring and paying for the goods or services. We anticipate that, in
the future, the government credit card will be used by the IRS to make
payments for deliveries, even in cases where a standard contract
document is the required purchasing method.
Question. Dennis Marty outlined some of the problems he had with
confusion over unemployment benefits and mortgage interest payments.
Generally speaking, if a bank made a mistake on a 1098 mortgage
interest form, who is held responsible--the bank or the taxpayer?
Answer. The filer of an information return is subject to penalties
under I.R.C. Sections 6721-6722 for providing incorrect information on
an information return filed with the Service and for any incorrect
information on the payee statement provided to the taxpayer. The
penalty is $50 per information return up to a limit of $250,000, and
$50 per payee statement up to a limit of $100,000. If the filer of the
incorrect information return and payee statement catches the error and
files a corrected information return and sends a corrected payee
statement, the taxpayer is responsible for filing an amended tax return
and paying any additional tax owed. In normal circumstances, the
taxpayer would not be liable for penalties in such cases.
Question. Are the rules of evidence that are applicable to the IRS
different from those that apply to other federal agencies?
Answer. Rules of evidence are set by formal rules of the various
courts and do not differ between parties (whether the government or
not) or between agencies including the Internal Revenue Service. In
federal courts, the ``Federal Rules of Evidence'' are used. By statute,
I.R.C. section 7453, the Tax Court also uses the same rules of
evidence. An exception exists for cases where the taxpayer elects to
use the small case procedures of the Tax Court. I.R.C. section 7463. In
such cases, which are informal proceedings, any evidence deemed to have
value can be considered without regard to the formal rules of evidence.
Tax Court Rule 177(b). This rule permits taxpayers to present their own
cases, usually unassisted by representatives who would be versed in the
evidentiary rules.
[Additional Note.--Although this question was framed in terms of
rules of evidence, it is possible that it meant to refer to burden of
proof. A burden of proof is not strictly a rule of evidence but rather
determines how issues are to be decided based upon the evidence
produced. Burdens of proof are set by issue specific or generic
statutes, formal rules of court, and discretionary judgments of courts
based upon common law principles. When made by statute, they are
usually made with reference to the legal issues involved and the social
and legal policies inherent in those issues, so no real comparison can
be made between agencies which deal with different laws and issues.]
Question. What are the IRS guidelines for expanding an audit? Can
it be done simply because the auditor wants to do so?
Answer. In office examination, group manager approval is required
to expand the examination beyond the issues that were pre-classified.
In field examination, expanding the issues is primarily a revenue agent
decision that would require group manager approval in limited
situations.
In all cases where an examiner requests another return (prior year,
subsequent year or related), group manager approval is necessary.
The examiner (revenue agent or tax auditor) is required to use
professional judgment in determining scope and depth of the
examination. Some preliminary issues may be pre-identified on the
return; however, it is the responsibility of the examiner to expand or
limit the examination based on further review and analysis of the
return, taxpayer records and statements and any other available related
information. An examiner may decide to expand the examination to
include additional issues, prior and/or subsequent year returns or
related returns. Related returns are any other return that have a
direct relationship to the return under examination, such as financial
transactions that directly affect both returns.
Question. Both Amy Powers and Katherine Morehead are classic
examples of problems faced by an innocent spouse. What protections are
currently available for innocent spouses in these types of situations?
What more can be done?
Answer. Under existing law, when a married couple files a joint tax
return, each spouse is liable for the full amount of income tax for
that year. Under certain circumstances which are enumerated in Internal
Revenue Code section 6013, one spouse may qualify as an ``innocent
spouse'' and be relieved of joint liability. In February 1998, the IRS
announced a number of administrative actions to ensure that spouses who
may qualify for such relief can apply for it. These actions were:
1. Issuance of special form--Form 8857, Request for Innocent Spouse
Relief--which was available on the Internet on March 31 whereby spouses
can file a claim for innocent spouse relief;
2. Centralization of innocent spouse claims (Forms 8857) in one
service center;
3. Training to ensure the proper recognition and routing procedures
for the mail opening operation in all ten service centers to review and
recognize cases for appropriate routing;
4. Establishment of procedures to ensure that taxpayers calling the
toll-free telephone service with questions about innocent spouse will
be directed to a specialist trained in the innocent spouse provisions
of the tax law;
5. Initiation of a program of focused outreach on both the national
and local levels to community organizations that serve abused or
battered spouses to identify those who might qualify for relief under
the innocent spouse provisions;
6. Mandatory discussions with taxpayers of innocent spouse
provisions at the conclusion of the audit, where such provisions could
be applicable.
The current House Bill and Senate Bill on Restructuring the IRS
contain provisions on innocent spouse relief which will result in more
spouses qualifying for such relief than under the existing law.
Question. As you know, the Senate Finance Committee recently
approved an IRS reform package which will soon be considered by the
Senate. One of the provisions of Senator Roth's bill would change the
innocent spouse relief requirements to allow them to pay taxes on their
own incomes only. That provision would become effective in time for the
1999 filing season. That seems a long time to wait for relief. Can't
this change be implemented any faster?
Answer. As passed by the Senate, this provision currently is
effective for tax liabilities arising after the date of enactment and
any liability arising on or before such date, but remaining unpaid as
of such date. I took a careful look at the provisions in the Senate
Restructuring bill in light of our century date change and 1999 filing
season efforts and requested later effective dates for some provisions.
The innocent spouse provision is very complex and cannot effectively be
administered on a manual basis; an automated system must be developed
and implemented to reduce the likelihood of error. In the near term,
the IRS must manage a large number of complex tasks, each of which must
be completed on time to avoid failure of the tax administration system.
Thus, even if these provisions are feasible individually, the
cumulative impact of a group of proposals can seriously imperil our
ability to successfully conduct the 1999 filing season as well as
implement our century date change program.
Question. According to the information provided by Ms. Powers, she
received notification of a tax obligation five years after she filed
which showed that a $13,000 tax balance owed had miraculously become
almost $35,000. And, she didn't even know that the original amount was
owed. How does this happen? What steps, if any, do you plan to take to
make sure that taxpayers are notified of a tax obligation BEFORE any
interest and/or penalties begin to accrue?
Answer. The IRS sends notices, including notice and demand for
payment, to the last known address of the taxpayer. In the case of
divorced or separated spouses, one spouse may receive these notices and
may not inform the other spouse. Under existing law, many penalties and
interest begin to accrue on the tax obligation from the due date of the
tax return. Penalties and interest can only be abated under certain
circumstances provided by law and failure to receive notification of a
tax obligation is not one of these circumstances. The Senate
Restructuring Bill expands relief for innocent spouses and will provide
additional relief for divorced or separated taxpayers.
Question. Dr. Alvin Stjernholm was on the receiving end of tax
audits for 16 consecutive years. Is that some sort of a record, or is
that common? What is the statute of limitations on tax liability?
Answer. Records are not maintained on the frequency of audits of an
individual taxpayer. However, 16 consecutive audits would not be
common.
There is no limitation on the frequency with which a taxpayer may
be selected for examination. However, if the examination results in a
no change or minimal changes to the tax liability, the taxpayer is
entitled to relief from any examination involving the same issues for
the two years following the year of the no change or minimal change.
IRC 6501(a) and 6501(b)(1) provide that the statute of limitations
for assessment is generally three years after the return is filed or
due (without regard to extensions), whichever is later. The IRC
provides for several exceptions to the general rule--fraud and
substantial understatement of income are two examples. A taxpayer may
be asked to extend the statute of limitations when a taxpayer is under
examination and the statute of limitations may expire before the
examination can be completed.
Question. What is the process for auctioning a taxpayer's assets to
settle a tax debt? How often are items auctioned off for significantly
less than what they are worth? Is the debt actually settled after the
auction?
Answer. The process of auctioning a taxpayer's assets begins with
seizing the asset and establishing a fair market value for the
property. Some methods used to establish the fair market value are
comparable sales, and in the case of specialized property, appraisal of
the asset, which the Service may provide. A minimum bid price, as
required the Internal Revenue Code Section 6335, is established. The
purpose of the minimum bid is to conserve the taxpayer's equity by
setting a price that is generally above eighty percent (80 percent) of
the forced sale value of the taxpayer's interest in the asset, less
encumbrances having priority over the Federal Tax Lien. Internal
Revenue Service Policy Statement P-5-35 limits establishing the minimum
bid above the amount of tax, additions to the tax, and the expenses of
the sale; however, it does not limit the amount prospective buyers can
bid. The taxpayer is provided with documentation that informs him or
her of the minimum bid amount, an explanation of how the bid was
determined, and instructions for the taxpayer on how to appeal the
Service's determination of value and computation of the minimum bid.
The property may be offered for sale at a public auction sale or
under sealed bid. A public auction may be conducted by a revenue
officer or by a professional auctioneer. The objective of the sale
process is to maximize the amount realized at the sale that can be
applied to the taxpayer's account. Marketing and advertising the
assets, or using an auctioneer are strategies used to maximize bids.
The assets are sold as-is, where-is, and without recourse to the
government.
We have no data at the National level to show how often assets were
sold for significantly less than their value or to identify if the tax
debt was settled after the auction. However, many taxpayers do not have
sufficient equity in assets to settle their entire tax debt. For
example, in fiscal year 1997, 27.5 percent of the seized cases were
sold netting $159,960,760. The average balance due per seized case was
$179,546 and the average net yield per seizure was $16,429. Indeed, the
seizure enforcement action also had impact on the 18.9 percent of the
seizures that were redeemed and the 49.1 percent of the seizures that
were released for various reasons (the taxpayer entered into an
installment agreement or the government received their interest in the
property). Interestingly, of the seizures released, only 3 percent did
not meet the minimum bid and therefore were also released. The
remaining 4.5 percent of the seizures were cash seizures, not requiring
an auction.
Question. The new IRS you envision is supposed to be more customer
friendly. As you heard, Robert Lesher tried to get help from a Problem
Resolution Officer and instead found himself in a bureaucratic maze of
unavailable forms and unknown time frames. What changes do you envision
to the PRO system to address these types of problems?
Answer. While I am not able to comment on the specific
circumstances surrounding Mr. Lesher's case. I can tell you that the
local Taxpayer Advocate took action to discover why there was a
breakdown in securing a Form 911. He learned that the forms
distribution centers had been instructed to destroy all existing copies
of Form 911, due to a change in the form. As a result, several
taxpayers and practitioners were left with no source of Form 911. This
should not have happened; however, due to the efforts of the Taxpayer
Advocate, procedures were developed to ensure that Forms 911 are not
destroyed until replacement copies are available.
Action was also taken to instruct toll free and walk-in employees
that they have a responsibility to obtain information from taxpayers
when they ask for Form 911 and that they (IRS employees) are to take
action to relieve the hardship or write up Form 911 and route it
directly to the Taxpayer Advocate's office. In addition, our employees
are trained to tell taxpayers that they can submit an Application for
Taxpayer Assistance Order without the Form 911 if necessary.
This issue raised an important point. We will never eliminate all
problems, but the point is to identify weaknesses in our way of doing
business with taxpayers, and take corrective actions so that taxpayers
are not disadvantaged.
Question. What are the IRS rules or guidelines for dealing with a
taxpayer whose family is experiencing severe health problems?
Answer. While there are no written rules or guidelines for dealing
with a taxpayer whose family is experiencing severe health problems,
the IRS does make every effort to provide taxpayers, to the extent the
law allows, flexibility in interacting with the IRS.
Question. Mr. Rossotti, you may have read an April 7 article in the
Boston Globe entitled ``IRS won't take Acton man's canceled check for
answer''. In a nutshell, the taxpayer paid his 1996 income tax by
check, which was deposited by the IRS, and the canceled check was
returned to the taxpayer by his bank. Well, somehow the money got lost
and now the IRS is demanding that the taxpayer pay again. This seems
pretty unfair to me. Are you familiar with this article? Can you
justify the IRS actions?
Answer. Yes, I am aware of this story reported in the media. While
I cannot address the specific facts of this individual situation
because of privacy restrictions, I can give you specifics on the
procedures the IRS has in place for handling cases when a taxpayer has
not been credited for a payment. When a taxpayer must be contacted to
resolve the problem, the IRS asks for a front and back copy of the
canceled check. The back of the check provides coding information that
allows for the funds to be traced from bank to bank. The canceled check
is proof of payment and is honored by the IRS. If the taxpayer in this
instance was told otherwise, that was incorrect and we have apologized
to him for this.
Question. Commissioner Rossotti, you have stated that the IRS has
begun addressing problem areas that surfaced during the Senate hearings
last fall about IRS abuse of taxpayers. When will taxpayers, on the
outside looking in, be able to see a difference in the way they are
treated by the IRS?
Answer. As I have previously stated, I believe that the IRS, over
time, can greatly improve its service to the public. In the near term,
we are taking action to move forward toward these goals. Since the
September hearings before the Senate Finance Committee, the IRS created
a number of initiatives to improve taxpayer service and help taxpayers
comply with the law. Last November we began hosting monthly Problem
Solving Days across the country. Taxpayers have consistently given IRS
high marks for the service they received at Problem Solving Day. We
extended the hours of telephone service this filing season to 16 hours
a day 6 days a week. As part of our Saturday Service Days, we also
hosted Problem Prevention Days and sponsored an Earned Income Tax
Credit Awareness Day to help taxpayers determine if they are eligible
for the credit and then show them the correct way to fill out the tax
return. Even though these are small first steps, the feedback that we
are receiving is that taxpayers are seeing a difference in the service
that they receive from the IRS. Testimony provided by practitioner
representatives before the House Ways and Means Oversight Subcommittee
praised IRS' efforts to improve customer service performance during
this year's filing season. One practitioner, in his testimony, stated
that others in the field have reported that the IRS personnel they have
been dealing with have mostly been cooperative in their efforts to iron
out taxpayer problems and assist citizens in putting together
installment agreements or offers in compromise in order to resolve
their cases.
Question. Is the IRS conducting a thorough review of IRS employees
who have had any direct interaction with taxpayers of their treatment
of taxpayers?
Answer. After the IRS oversight hearings conducted by the Senate
Finance Committee in September 1997, the IRS Inspection Service
initiated internal audits on the use of enforcement statistics,
collection enforcement actions, and controls in the examination
process. Inspection also initiated some investigations of alleged
misconduct by IRS employees. Completed investigations have been
referred to a Treasury review board for administrative action. Internal
audits and investigations are continuing. In addition, the Treasury
Inspector General has conducted investigations on this subject.
In more general terms, in an effort to make sure we have the proper
mechanism in place to review complaints about employees, IRS will be
convening a Disciplinary Action Review Task Force to review our
complaint intake systems (e.g., Automated Labor and Employee Relations
Tracking System (ALERTS), the Equal Employment Opportunity office, the
Chief Inspector, and correspondence to the Commissioner (Executive
Control Management System--ECMS). With the assistance of an outside
expert, the task force will assess the number and type of complaints/
disciplinary actions; determine if we should integrate the intake
systems (the same complaint might come in through several channels);
and determine the appropriate level of agency oversight.
Question. What type of training are employees with direct
interaction with taxpayers currently receiving? Are you planning any
changes to that training?
Answer. There is a wide range of training in development and
currently being delivered. For example, front-line employees in
Compliance (Examination and Collection) are receiving training on
interviewing techniques, alternative dispute resolution, conflict
management, and customer service as well as technical training on the
Taxpayer Relief Act of 1997. In addition, we are developing training to
move the organization to deliver World Class Customer Service. This
training will be delivered to all employees to direct our
organizational focus to the delivery of quality customer service which
meets the needs of the American taxpayer. We are in the process of
asking members of the Commissioner's Advisory Group to assist in the
review of training materials, offer comments and recommend changes in
the way the material is presented.
Question. I believe many would agree that IRS employees' attitudes
must change. Will training help to make that change? The point I'm
making is that given the reputation of the IRS with the taxpayers, I
think the front line is the first place for you to start making
changes.
Answer. Clearly, training is key to improving the attitudes and
performance of IRS employees. The front line employees who meet and
deal with taxpayers must be the immediate recipients of training if we
are to influence our reputation with the American taxpayer. To this
end, we have developed competency assessment instruments to measure
customer service attitudes and technical proficiency. These instruments
have provided information upon which we have developed and piloted
training. This training has resulted in greater customer service and
technical performance on the part of those employees who have
participated in the training. We will extend this training to all
employees through the World Class Customer Service initiatives.
Question. Mr. Rossotti, you heard the testimony of Ken Tuckman and
what he believes his company can do to assist the IRS. His ideas appear
to dovetail nicely with your own ideas of providing better customer
service. Do you think there is a place for such a contract support
organization within the IRS?
Answer. To further our goal to provide world class customer
service, it is my intention to tap into corporate expertise when
appropriate. Currently, we do have several initiatives underway that
are customer focused and conceptually similar to Mr. Tuckman's
proposals. These initiatives are designed to foster improvement without
relying on new technology. Some of the current initiatives are:
improvement of training strategies; enhancement of reference materials
and other tools available to Customer Service Representatives;
reassessment of work processes, work flow, required skills, etc.; and,
improved hiring and recruiting practices.
Question. The most obvious use for such a first-line customer
service operation is to answer routine non-tax questions--such as where
to get forms or what form goes with what kind of income. Do you happen
to know what percentage of calls to the IRS during peak filing season
fall into that category?
Answer. During the period of January 1, 1998, to April 18, 1998,
approximately 6 percent of the calls handled by assistors (on the tax
law and tax account lines) were requests for information regarding
forms i.e., forms ordering and forms help. An additional five million
calls requesting forms were placed to the 1-800-TAX-FORM line during
this period.
NONDEPARTMENTAL WITNESS
STATEMENT OF ROBERT M. TOBIAS, PRESIDENT, NATIONAL
TREASURY EMPLOYEES UNION
Introduction of Witness
Senator Campbell. With that, we will just go right into Mr.
Tobias' testimony, and thank you also for being here.
You can just go ahead and proceed, Mr. Tobias.
Mr. Tobias. Good morning, Mr. Chairman. Thank you very much
for providing NTEU with an opportunity to testify today.
I want to start by saying that the vast majority of
Internal Revenue Service employees are dedicated, committed,
and extremely competent employees. I say this because I believe
it and I say it because the data that has recently been
collected supports that conclusion.
Over the past 4 fiscal years, fiscal years 1995 to 1998,
the IRS collected 24 percent more revenue, handled 8 percent
more returns, with 13 percent fewer resources, or $1 billion
less in constant dollars. In fiscal year 1995, IRS processed
193 million returns, and in fiscal year 1998, we will process
208.4 million returns.
In addition, the number of calls answered has increased
from 101.2 million in----
Senator Campbell. Could I interrupt you just a moment? I
noticed when Mr. Rossotti sat down, we suddenly had an influx
of people running up to sit right beside him and behind him. I
would tell folks in the audience that he can't solve your
problems here in 10 minutes that you may have with the IRS, and
I would hope that you would let him hear the testimony, because
he is going to have to respond to a lot of this testimony, and
not encumber him with your personal problems. We have a process
by which we deal with that, and we will certainly help you
through our Senate office, too. But he needs to listen to this
testimony.
Go ahead, Mr. Tobias.
Mr. Tobias. In addition, the number of calls answered has
increased from 101.2 million in 1995 to 120.6 million in 1998.
And the level of access or the opportunity to actually reach
the IRS has increased from 30 percent, an abysmally low level,
in 1996 to, as Commissioner Rossotti testified, we expect 75
percent in 1998. And the accuracy rate for those calls is 96
percent.
More work has been done at considerably less cost. In 1995,
it cost 59 cents to collect $100 of revenue, and in 1998, it
will be 47 cents. No other tax collection agency in the world
is even close. Most democracies spend between $1.25 and $1.70.
More work, less cost, and 11,000 fewer employees since
1995--IRS employees have performed well.
The good performance is reflected in the evaluations
taxpayers who have an actual transaction with the IRS provide.
The results, I believe, are very good.
Commissioner Rossotti testified about the problem-solving
days that the IRS recently initiated, starting on November 15.
The taxpayers have evaluated employees overall at a 6.45 level
on a 7-point scale.
The Examination Division has now begun customer
satisfaction surveys. The initial results show that 5.9 percent
rate audits as unfair and 76.3 percent rate the IRS as fair--
the highest rating; and 3.6 percent rate the employees
disrespectful, and 81.5 percent respectful--the highest rating.
And there was a Harris poll that was released today which
showed that 6 percent of the public believe they have been
treated unfairly by IRS personnel, whereas 76 percent say they
were treated fairly by the IRS. Five percent of the public say
the IRS has been discourteous and, in contrast, 83 percent say
the IRS has been courteous.
We certainly need more customer satisfaction data, but what
we have collected is very favorable.
The solutions, I believe, to the problems you heard today
lay in a reorganized IRS consistent with what Commissioner
Rossotti recently testified, an IRS reorganized along business
lines.
As a member of the committee to restructure the IRS, I
supported this concept, and I have supported the Commissioner's
approach. It will focus accountability and allow the IRS to
fulfill its responsibilities to those taxpayers who are
compliant and those who seek to be compliant. The solution to
the problem also, I believe, is to appropriate the full amount
requested by the President.
The IRS needs the requested funds to implement the vast
changes in the tax law enacted in 1997. It needs the funds to
implement the Y2K effort. It needs the funds to improve
business technologies, laptops for revenue agents, computers
for revenue officers. It needs the money to improve the level
of access from the 75 percent this year to the planned 86
percent in 1999. And it needs the money to provide for needed
training.
Cutting the IRS budget, as some have proposed, won't solve
the IRS problems. It will make the IRS worse. I certainly urge
you and the committee to appropriate the full requested amount.
I think the IRS is on the right track, and I am hopeful that
with this appropriation it won't be derailed.
Thank you very much, Mr. Chairman.
Prepared Statement
Senator Campbell. Thank you, Mr. Tobias. We have your
complete statement and it will be made part of the record.
[The statement follows:]
Prepared Statement of Robert M. Tobias
Chairman Campbell, I am very pleased to be here today to discuss
the views of the National Treasury Employees Union (NTEU) on the needs
and operations of the Internal Revenue Service. I have served as
President of the NTEU since 1983 and have been associated with NTEU
since 1968. NTEU represents approximately 150,000 federal employees,
roughly 95,000 of whom work for the IRS.
The IRS has had many problems in recent years, including serious
difficulties in acquiring and utilizing technology needed to allow
employees to perform their jobs at levels that taxpayers rightly
expect. Funding and training cutbacks have also created problems.
Between 1992 and 1998 the agency has cut nearly 15,000 employees,
leaving many functions, such as customer service, understaffed and
woefully undertrained.
The IRS Restructuring Commission on which I served looked carefully
into the many problems facing the IRS and the taxpayers who must
interact with it. The Commission's thoughtful analysis of the problems
and solutions provide a solid guide to getting the IRS back on track.
But, the Commission's recommendations might have languished on a shelf
without the impetus for action created by hearings held by the Senate
Finance Committee last September. Those hearings were very painful for
the IRS employees I represent.
They were painful because the vast majority of IRS employees try
very hard, despite antiquated computers, sometimes misguided managers
and public disdain to do the best job possible for the taxpayers, yet
the message of the hearings that filtered through the media all across
the country was that most IRS employees were incompetent at best and
evil at worst. Senator Roth repeatedly stated that most IRS employees
do a good job and that Congress' interest is in correcting systemic
problems and in protecting employees from management abuses.
The hearings were painful for IRS employees for other reasons as
well. They were painful because many of the problems that were
highlighted were problems that IRS employees knew could have been
avoided. The most glaring of these problems, that of overly aggressive
tax collection efforts, could have been avoided if the Field Office
Performance Index, which has been suspended since the hearings, had
never been adopted. NTEU had strenuously opposed the use of this system
that measured and rated each IRS Field Office by the amount of
collection revenue brought in. We knew that even though individual
employee quotas had been outlawed, this system would have the same
result by pushing district managers to push employees to emphasize
collection statistics rather than fair treatment. And, in fact, those
hearings and subsequent IRS internal investigations have found a number
of managers who have done just that.
I believe that lack of training, outdated technology, low pay and
the ``stovepipe,'' compartmentalized structure of the IRS contributed
to the inability of taxpayers to get their problems solved. I believe
that Commissioner Rossotti's proposals to change the IRS structure to
make it more responsive to taxpayers will make it easier for IRS
employees to provide better customer service. I also believe that the
institution of ``problem solving days'' has been helpful in providing
IRS employees with an additional means to help solve taxpayers'
problems and should serve as a model for how all of the IRS's
departments should work together to solve taxpayers' problems all the
time. But much more needs to be done and the most important step to
addressing the problems raised in last September's hearings is
enactment of H.R. 2676, which passed the House by a vote of 426 to 4 in
November of 1997.
One issue critical to success for IRS reform that is not directly
addressed in H.R. 2676 is adequate funding. Employees cannot provide
quality service to taxpayers without adequate pay, training, technology
and facilities. The federal employees who serve at the Internal Revenue
Service want to provide world-class service. But as we have heard time
and again, just like their private sector counterparts, federal
employees must have the tools to get the job done right. Budgetary
driven personnel restrictions often prevent the agency from hiring the
employees they require to adequately handle the workload. Restrictions
and promotions and limited advancement opportunities lead to morale
problems. The lack of funding for training creates situations where
employees are thrust into situations they are unable to handle to the
level taxpayers expect and deserve. Congress has the ability to correct
these problems and put the agency on a solid, long-term course with
success. Not only success from the standpoint of collecting taxes owed,
but success from the view of taxpayers who must deal with the agency.
No one will ever enjoy paying their taxes, but, at a minimum, they
should come away from their dealings with the agency believing they
have been treated with respect and dignity. The IRS can and will be a
world-class organization with the proper tools and funding.
Right now, customer service representatives at the IRS earn on
average around $28,000 a year, with an absolute maximum salary in the
highest cost city of the country (San Francisco) of $36,027. The
customer service representative is the person who is charged with
answering every question that any taxpayer across the country may have
when they call the IRS for help. This is the person charged with having
intricate knowledge of the entire U.S. Tax Code, including the 9,000
pages just added last year. A law school graduate working as a first
year associate at a tax law firm would laugh at that salary. Even
customer service representatives at other federal agencies, like the
Social Security Administration, earn more money. That must change. IRS
must be able to attract, retain and promote individuals who will
provide world class customer service.
I would note that Senator Gramm of Texas stated at the Finance
Committee hearing on January 28th that IRS employees needed to be paid
more. I would like to second that sentiment and emphasize that not only
the top technology people need to be paid more, but to ensure quality
service to taxpayers, front line employees need to be paid more as
well.
Despite the monumental amount of knowledge required to perform the
customer service jobs well, little, and in some cases, no training is
provided. I have heard of many cases in which IRS employees who
ordinarily perform other functions have been told to answer taxpayer
calls and man walk in sites with no training at all. One IRS employee
temporarily assigned to cover a taxpayer service window with no
training recently told me that she felt terrible having to tell a
taxpayer that all she could do was to take her information and ask
someone else to get back to her. She said she understood and
sympathized with the taxpayer's anger over not being able to get an
answer to her question, but that she was more afraid of giving the
taxpayer the wrong answer. This also must change and I believe ensuring
the availability of appropriate training can be addressed in the
context of a new performance management system as required by section
9302 of the H.R. 2676.
Mr. Chairman, the plain fact is that no one, not even the Congress,
can have it both ways. We cannot expect the IRS to eliminate its
problems if we cut its budget. That makes no sense. I hope this
Congress will provide the funding necessary to achieve the level of
service taxpayers expect and deserve.
NTEU believes that the President's budget proposal is the absolute
minimum required to begin a reinvention of the IRS ``around taxpayers
needs.'' However, there are some in the Congress who are seeking to gut
the IRS budget instead of providing the resources indispensable to that
necessary restructuring. The Senate Budget Committee's recent action to
cut the President's request for the IRS by 6 percent--some $500
million--makes no sense. It is the wrong cut, in the wrong place, and
at the wrong time.
Both the recently announced Gore-Rubin ``Reinventing Service at the
IRS'' report and the President's budget are solid first steps in
response to taxpayers' concerns. The Congress must not ignore them. As
the new IRS Commissioner, Mr. Rossotti, advised both the Senate and
House Appropriations Subcommittees in early March: ``The fiscal year
1999 budget we are requesting is absolutely essential to begin this
long-term transformation.''
The total budget request for fiscal year 1999 is $8.196 billion and
100,829 FTE. The total budget request includes a net increase of $529
million and 1,232 FTE over the fiscal year 1998 level. Of this
increase, $176 million represents part of the cost that would be needed
to maintain the current level of operations, taking into account
inflation and mandatory pay increases. The remaining increases
represent funding dedicated to improved near-term customer service
($103 million), near-term and long-term technology investments ($227
million) and organizational modernization ($25 million).
I have spent a good amount of time with Commissioner Rossotti. I
support his reorganization proposals and have joined with him to urge
all IRS employees to do the same. Foremost among the funding
initiatives proposed for fiscal year 1999, NTEU believes that the
Congress should consider the $103 million for near-term improvements in
customer service as one of its highest priorities. In my role on the
IRS Commission, I advocated the position that the IRS needed to make
customer service its number one priority. I believe Commissioner
Rossotti agrees with that view.
Mr. Chairman, even though we agree that the IRS needs to do much
more to improve its operations, IRS employees are performing
exceedingly well in comparison to any similar organization in the
world. Over the past four fiscal years, fiscal year 1995 to fiscal year
1998, the IRS collected 24 percent more revenue, handled 8 percent more
returns with 13 percent fewer resources, or more than $1 billion less,
in constant dollars. In fiscal year 1995, the IRS processed 193.3
million returns. In fiscal year 1998, it is expected to process 208.4
million returns. In the past year, the total tax revenue collected rose
by more than $70 billion while the agency processed an additional 5.8
million returns. Revenues were $1.36 trillion in fiscal year 1996; $1.5
trillion in fiscal year 1997; $1.58 trillion in fiscal year 1998, and
projected revenues for fiscal year 1999 are $1.64 trillion. In
addition, the accuracy rates for tax law inquiries, accounts
information and refunds have dramatically improved.
In fiscal year 1995, the cost to collect $100 of revenue was 59
cents. In fiscal year 1996, the cost was 53 cents and in fiscal year
1997, 48 cents. In fiscal year 1998, the cost to collect $100 should
drop to 47 cents. No tax collection agency anywhere comes close, much
less matches the IRS cost per dollar of revenue raised. Most
democracies spend nearly three to four times that much, $1.25 to $1.70,
to collect $100 in income tax revenue.
In 1997, the 102,000 IRS employees collected more than $1.5
billion, processed 215 million tax returns, issued almost 88 million
refunds, assisted more than 110 million taxpayers, distributed more
than one billion forms and publications, sent 70 million notices and
letters to taxpayers, processed more than one billion information
documents, completed more than 1.5 million audits and assessed $10.4
billion on delinquent returns. In fiscal year 1998, the IRS will answer
more than 120 million telephone calls, provide walk-in service to
nearly nine million taxpayers, and will examine nearly 1.3 million
individual returns.
Mr. Chairman I believe this data shows without a doubt that IRS
employees have been performing remarkably well. Despite inadequate
resources and a host of poor management practices that failed to
prevent the well-publicized failings of some, IRS employees are the
best in the world at what they do and are consistently getting better.
But you can only squeeze people so hard for so long. There's a limit.
We cannot expect the IRS to continue to improve, especially in the area
of customer service, without investing the resources that Commissioner
Rossotti, the Rubin-Gore Task Force and the Restructuring Commission
have recommended. NTEU strongly urges that the Congress to provide
these resources.
Mr. Chairman, thank you for this opportunity to present the views
of the National Treasury Employees Union at today's hearing. I applaud
you and other members of the Subcommittee for taking a closer look at
the operations and the needs of the Internal Revenue Service. I would
be pleased to answer any questions you may have.
Accountability for IRS Budget
Senator Campbell. Our committee will be dealing with their
budget, as you know, and we have the last couple years been
trying to provide the additional revenue to bring them up to
speed, particularly for the needed equipment for particularly
the year 2000. But in addition to that, you know, we have to
have accountability. And as you probably know, in the past
there has been money appropriated that it has been very
questionable about what it was used for. I have heard a lot of
different numbers, and I don't want to try and dig through my
hearing notebook, but there was literally millions and millions
of dollars that apparently was misspent on the wrong kinds of
equipment, the wrong kinds of computers and so on. So, you
know, I am supportive of bringing it up to speed so it can do a
better job, but by the same token, I have to be accountable to
my constituents about where we are spending their money. And I
think the agencies have to be equally accountable about how
they are using it.
I might say from your particular position, you are, I
guess, a little like me in that you, in fact, become sort of an
ambassador. You are a representative of that agency, working
for it, just as I am of the U.S. Senate. And even though the
statistics say most people in any given area, let's say
policemen, for instance, do a terrific job, you only have to
have one really bad experience with a policeman--or a Senator
or perhaps an IRS official or an IRS agent--to really sour you
on the whole thing. And I think when people tell us about how
they lost their home, my gosh, literally had their family
destroyed, boy, those are crucial, terrible things to hear.
So from that perspective, I think a lot of us kind of try
and use the zero tolerance theory. If there is one bad apple in
the Senate, it taints all of us. If there is one bad employee,
even though you have tens of thousands, it certainly taints the
whole agency. And one bad policeman taints a police department.
So I would hope that the NTEU is also aware of that and is
continually trying to strive to, you know, upgrade their
performance, do a better job with their customers or, as we
call them, constituents.
Mr. Tobias. Well, I believe, Mr. Chairman, that every
transaction that an IRS employee has is like opening night of a
Broadway play; that is, that employee is indeed the face of the
IRS, and the IRS is judged ill or well based on that
transaction. And I think it is important that employees not
only understand that intellectually, but that they be provided
the technology, that they be provided the training, and they be
provided the time--the time--in order to provide the kind of
service that I think employees want to provide.
I believe the employees in the Internal Revenue Service
want to provide that service, and if they are provided the
time, the technology, and the training, I think you will see
many, many fewer of the kind of taxpayer transactions that we
have been hearing about over the last year.
Senator Campbell. Well, those of us in the Senate are
dealing with it. I think we are determined to make change, and
I really think that the Commissioner is also determined to make
change. And I would hope that the NTEU is also willing to
participate in that and to help effect changes that are going
to make it better for everyone, not only employees of the IRS
and the Federal Government but the constituents and the average
American taxpayer that has to pay the bill.
Mr. Tobias. There is no question that NTEU is interested in
participating in making the IRS more efficient, more effective,
and, most importantly, more responsive to the complaints of the
taxpaying public.
Senator Campbell. OK. I thank you.
I thank you for your appearance, and that is the last
person who will testify. And, Mr. Tobias, we may have some
additional questions to send in, if you would submit your
answers in writing.
Conclusion of Hearing
And if there is anybody in the audience who would like to
comment on this hearing, if you would submit in writing what
you would like us to study and to be included, if you think
there are some changes--these bills are working their way
through Congress now--we would appreciate you submitting those
in about the next 7 days before our hearings are completed.
With that, thank you for your attendance, and that
concludes the hearing.
[Whereupon, at 11:58 a.m., Tuesday, April 14, the hearing
was concluded and the subcommittee was recessed, to reconvene
subject to the call of the Chair.]
MATERIAL SUBMITTED SUBSEQUENT TO CONCLUSION OF HEARING
[Clerk's note.--The following material was not presented at
the hearing, but was submitted to the subcommittee for
inclusion in the record subsequent to the hearing:]
Prepared Statement of Charles Pat Smith, State Adjutant, the American
Legion, Department of Colorado
Thank you for the opportunity to appear before this committee to
discuss the IRS and The American Legion.
My name is Charles Pat Smith and I am the Executive Director for
The American Legion Department of Colorado. The American Legion is a
veteran's organization founded in 1919 to assist those returning WWI
veterans with their physical and mental problems that they encountered
while serving their country. We were founded also to assist the widows
and orphans of those who did not return, to promote Americanism and
Patriotism in our country, to speak out on issues affecting the
security of our country and to enhance the lives of the children of
this country. After almost 80 years our mission remains the same today.
The American Legion has always enjoyed the status of a non-profit
organization under IRS guidelines and we have been provided a group
exemption number. The beginning of our preamble to our constitution
states, and I quote, ``We associate ourselves together for the
following purposes: To uphold and defend the Constitution of the United
States of America; to maintain law and order * * *.'' The American
Legion truly believes in these precepts. A study of our history will
show that we are law-abiding citizens. As an organization we pay our
taxes that we are required to pay. We follow the laws of the country as
set forth by the Congress of the United States. Where we disagree with
the laws we seek to change those laws in a peaceful orderly manner. We
use the system of government that we, as veterans, fought to preserve
to make meaningful changes for all of our citizens. And that brings us
to the subject before us today, abuses by the IRS as they relate to the
American Legion, and other non-profit organizations.
Early in the 1930's the Congress of the United States passed a law
that required those individuals in our society who sought to enrich
themselves through illegal gambling activities to register with the IRS
as a professional gambler and to pay one-quarter of one percent (\1/4\
of 1 percent) of their gross ``wagers.'' Those professional gamblers
were also required to pay an ``occupational tax'' of $50.00. The law
was designed to provide a method of prosecuting those ``gangsters'' of
the time who were preying on society since prosecutions and convictions
of other types of crimes were hard to come by at that time. The
American Legion does not believe the intent of Congress back then was
to penalize non-profit organizations for conducting legal charitable
gaming activities in their communities. The American Legion does not
believe that subsequent changes in the law by Congress and regulations
and revenue rulings issued by the IRS apply to our charitable bingo and
pull tab operations.
I would like to quote the government's position taken from a recent
audit of an American Legion post. Quote, ``The fact that an
organization is exempt from Federal income tax under section 501 (a) of
the Code does not determine whether the taxes imposed by sections 4401
and 4411 are applicable. No provision in the Code exempts a nonprofit
organization, as such, from the wagering tax.'' We would submit to you
that no exemption is present in the code because, again, the intent of
Congress was to ``catch'' illegal gambling activities. If, in fact,
non-profit organizations are engaging in illegal activities where
individuals in the organizations are preying on society then apply the
law to those individuals and prosecute them, not the organization.
The IRS has launched a selective attack on American Legion Posts in
Colorado. We currently have 88 American Legion Posts and Auxiliary
Units conducting legal charitable gambling activities under the state
bingo and raffles law. The IRS agents have initiated audits of 13 of
those American Legion Post and/or units. The selection of the posts
that they are auditing apparently was random and they are apparently
using these posts as their ``test bed.'' It appears that the audits are
selective enforcement of the law and they are not conducting their
audits consistently across this state. The agents know they are dealing
with volunteers and that intimidation is easy. Several of our American
Legion Posts have paid the occupational tax and are paying the gross
wager fee on a monthly basis. They did so because it was easier to pay
than to question whether the law applied to them.
Of the 13 posts currently under audit the finding of tax liability
for those 13 amounts to under $40,000. The American Legion intends to
challenge the IRS's determination of liability through the internal IRS
appeal process and to tax court, if that becomes necessary. It is our
understanding that for the IRS to litigate a case before tax court it
will cost the government about $50,000 per individual case. For the 13
cases pending that would amount to $650,000 to collect just under
$40,000. How ridiculous. In addition to the cost to the government it
will cost the American Legion in legal fees, money better spent in the
community.
The IRS believes we are liable for the tax because sometimes
proceeds from our charitable gaming activities are used to pay
operational expenses for our post homes. Their rational is that this is
illegal because the payment of those expenses constitutes ``inurement
to the benefit of private shareholders and individuals.'' Again, how
ridiculous. We require our members to pay dues to give them the
opportunity to volunteer their time and support the organization with
their additional donations. Our post homes are community centers and
they do require upkeep and maintenance. Our post homes are used for
many activities that benefit the community, including boys and girls
scouts, community blood drives, and meeting places for other community
based organizations that don't have their own meeting place. For the
IRS to say that we can't use those legal gaming proceeds to pay
operational expenses is really stretching the law.
The other issue that indicates to us that The American Legion is
being singled out for these audits is that they have determined that
501c(4) social welfare organizations are not liable for the tax. The
American Legion is a 501c(19) organization; a classification designed
for veterans organizations. We meet all the requirements as set forth
in the c(4) status, and in fact we were originally a c(4) organization.
The difference is that Congress granted The American Legion the c(19)
status for two reasons. First to permit us to sell life insurance
products to our membership and, second to permit us to spend money in
pursuit of issues before Congress affecting veterans and their
families, or lobbying if you will. In every other aspect we are a c(4)
organization. So the question arises why are we being treated
differently, just because we are permitted to lobby Congress? At what
point does the liberal interpretation of the law in this case by the
IRS cease to be enforcement and become harassment?
So what is the solution? In our view we are not liable for the tax
and we will not be intimidated any further by the IRS. We believe they
are wrong and we will exercise our rights that we fought for as
veterans. Unfortunately that will cost everyone, both money and time.
We would ask this committee to ask the IRS Commissioner to look at this
situation with The American Legion here in Colorado and to rule on the
arbitrary and selective enforcement of the law. We would ask that this
committee consider writing into the law a specific exemption for non-
profit organizations that will settle the issue and again express the
intent of Congress as it existed when the original law was passed.
Let's punish the crooks, not the care-giving members of the American
Legion and their Auxiliary. Thank you for your time.
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